Chart of the week – deposits in US commercial banks

Summary: The growth of deposits in US banks continues to accelerate. The numbers imply healthy broad money growth, eventually translating into activity.

What does the chart show: The chart shows the thirteen-week (ie, three-month) annualised rate of change of deposits in US commercial banks. The red line is total deposits, the blue is large time deposits (ie, deposits in excess of $100,000) and the green line is other deposits. The thirteen-week annualised rate catches the most recent trends, but can be volatile.

Why is the chart interesting: Broad money is a leading indicator of economic activity. Broad money consists of the bank deposits of the private non-bank sector (ie, households and non-bank companies) and of cash. But of these two, cash is just short of 1.1 trillion dollars, while deposits total some 12.3 trillion dollars and are therefore vastly more important. Since early December, deposits have grown by double-digit rates. This is a clear indication of continued healthy, if not spectacular, US activity in 2013. The threat of the fiscal cliff is very much a myth.

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

Why we shouldn't have a Robin Hood Tax ourselves

You will no doubt have seen the news that a number of the eurozone countries have decided that they will have a Robin Hood, or financial transactions, tax. Given that the continentals are getting one we've obviously got the cries from the campaigners that obviously we must too. Sure, they've been saying all along that we should: and I've been saying all along that we shouldn't. And I'm now using the introduction of the tax to insist that we still shouldn't have one.

But I am even more correct than usual at this point. The very fact that they are getting this tax means that we really shouldn't have one now.

The basic case for the tax is that it will shrink finance, reduce price volatility and also at the same time raise a huge sum of tax money. The basic case against it is that it will shrink finance, raise price volatility and won't raise a bean: indeed, it will shrink the economy so much that total tax revenues will fall. You can read the detailed arguments here.

Of course, you could just say, well they would say that, wouldn't they? Those in favour are still in favour, those against are against.

But let us all be properly honest here. None of us actually knows what the effects of this tax are going to be. Oh, we can predict, we can work from theory, look at the effects of other such taxes. But no one has actually tried this particular experiment as yet. So there's uncertainty about everyone's predictions. And what is it that we do when we're uncertain? Well, if we can, we conduct an experiment.

And very fortunately, we have this experiment being conducted for us. All we have to do is observe it. Those eurozone nations will be in the tax and we and others will not. We should therefore be able to test and see whose predictions are in fact correct.

Most of the effects will be very difficult to measure. Will it shrink GDP? Well, what would it be without the tax? What would revenues be with a larger GDP but without the direct ones from the tax? We're well into Bastiat territory and trying to measure the unseen. But there is one that should be easily measurable: price volatility.

Those in favour of the tax say that "excessive" trading increases price volatility. The tax will reduce the amount of trading and thus volatility. Those against the tax say that reducing liquidity will increase price volatility. Thus the tax will increase volatility. And since we will have some markets which have the tax, others which do not, we should be able to see which holds: an increase or decrease in price volatility? Do, please, recall that this was the original argument in favour of the tax, to reduce said volatility.

We obviously need time to do this study, we need a few years' data. Which is why we really don't want to have such a tax ourselves as yet. We need to remain the control. So that we can actually find out whether the tax is a good idea or not.

In essence, that the continentals are going to have an FTT is exactly the reason why we shouldn't have one, not yet at least.

Christian Aid's If: Why won't these people read their own damn reports?

Another day another gaggle of idiots demanding that the world be run in their image. This time it's Christian Aid and the usual fellow travellers launching a campaign called "If".

Their basic observation, that's there's enough food that pops out of the fields of the earth to feed us all, is entirely true. Further, that despite this enough food there are those who go hungry, to the point of malnutition and starvation is also true. Thus it is also clearly true that it is desirable than we do something about this.

Excellent, but something must be done does not mean that this is the something that we must do. Their something(s) are that we should collect more tax, spend more in aid, bash the corporations and well, you've heard the list often enough, you can complete it.

Other than the obviously sensible idea that we should stop putting food into cars this is, I'm afraid, just the usual wibble. And what makes it so extremely annoying is that we've had a couple of reports recently telling us what actually does need to be done. Just last week it was IMechE and some months back Oxfam I think it was. They noted that food waste in this world divides into two. There's us people in the rich world who find food so convenient and cheap that we don't even bother to grind up the potato peels into nourishing gruel. Quite the shame on our society. In the poor parts of the world that's not the problem at all: anything not actually rancid that makes it into a poor household is going to get eaten.

There the problem is that up to 50% of the food rots or is envirmined between the field and the consumer. Our food waste could be solved by a good recipe for turnip scrapings. The poors' food problem could be solved by....well, by what? Well, by the same darn system that makes food so cheap for us. The commodity suppliers that do the trucking of food around, run the grain elevators, store the potatoes. The food commodity markets that allow the risks to be spread from farmers and consumers to speculators. The supermarkets and the industrial processing companies that extract every possible calorie and then present it to us in rat and roach free surroundings.

In short, what the poor world needs is a food industry as we have a food industry. One that gets the crops from the fields to where mothers can prepare it for their children without it rotting or being eaten by animals and bugs along the way.

So do they suggest that this is what should be done? The people who know how to solve the problem should be offered access to go and solve the problem? Do they heck:

If we force governments and big corporations to be honest and open about their actions that stop people getting enough food. Transparency and accountability are vital in the global food system. Decisions that can affect millions of people are made behind closed doors, without the participation of those affected. Corporates and governments must be more transparent about their affairs so that citizens can hold to account powerful players in the food system.

It's not that biig corporations aren't transparent. It's that big corporations who know how to do these things aren't there. Often aren't allowed to be there (as in India).

I'm all for solving problems like aiding the poor in gaining access to food. But I really do wish these campaigners would just bother to read what others have been trying to tell them on these very subjects.

After all, we are continually told that it's industrial agriculture and supermarkets that are making us all fat. And isn't that what we're trying to achieve? That the poor also gain an opportunity to get fat? So why aren't we recommending industrial agriculture and supermarkets as the solution?

I assume politics has something to do with this stupidity.

Tax: wake up and smell the competition

Just when you think it's safe to return to David Cameron, he bites you in the leg. That is what UK business leaders are thinking right now, after his warning to international companies to 'Wake up and smell the coffee' – a phrase that is supposed to remind us of Starbucks, the fact that they manage to pay very little tax in Britain, and how unpopular that is.

Well…corporation tax. Even Starbucks pays plenty of other taxes: business rates, value added tax, employer's national insurance, and all the income tax that is stopped out of their workers' salaries – though I've probably missed out import tariffs and a dozen others.

But Mr Cameron can't have it both ways. You cannot say you favour tax competition and then complain when you lose out from it. Nor that you believe in being part of an open Europe, for that matter. Companies are perfectly entitled to base themselves anywhere they like in the EU, and operate in any other part. If Britain's taxes are too high, they will simply base themselves somewhere else.

High taxes are forcing big companies out of Britain and small companies out of business. That point was made to me yesterday by a small-business friend who now says that he is doing two-thirds of his business online or out of offshore companies. The reason? The likes of Amazon, now selling not just books but all kinds of goods and indeed now services too, have an instant 40% tax advantage due to their foreign domicile. High-Street shops, with all their overheads and then their local and national government taxes, cannot compete with that.

This trend can only accelerate as more and more business is done online, through companies that hardly have any real domicile at all. People might complain about them not paying UK taxes, but they still buy their products, because they are so much cheaper. Mary Portas will not save the High Street, nor will trying to pursue international companies for any loose change that HMRC can screw out of them. But turning Britain into a tax haven might just do it.

It's time to wake up and smell the competition. The UK needs to make itself so attractive in terms of taxation and regulation that businesses actually start elbowing each other to move their operations here. Then we might see some recovery and stop whining about tax avoidance.

Moral hazard and crony capitalism

Yesterday I argued that we are facing a crisis of government that is leaving its mark on everybody. Today I want to mention some more hoof prints left on society by government.

"Crony Capitalism" is a description of an economy in which success in business depends on close relationships between business people and government. Crony Capitalism occurs when business people seek regulation and the massive cash flows held by government.

This rent seeking occurs through self-seeking behaviour by those competing to receive rents generated by government decision making. Rent-seeking includes lobbying for positions and contracts and campaigning for policies that create rents. Rents are revenues paid to favoured companies or individuals for services rendered. Rent seeking is endemic in crony capitalist systems today. When rent-seeking and payoff become more important to producers than the delivery of goods or services to customers, it causes markets to eventually fail. 

In his seminal 1971 paper, "Theory of economic regulation", Nobel laureate economist George Stigler observed that regulation by the state is a more important source of rents, benefitting incumbent firms and individuals at the expense of potential competitors (this rent is sometimes referred to as gains from "barriers to entry").

Moreover, Stigler suggested that regulation is sought by the regulated industry - and is designed and operated primarily for the industry's benefit. Consumer activists Mark Green and Ralph Nader largely concurred, writing in 1973, "the verdict is nearly unanimous that economic regulation over rates, entry, mergers, and technology has been anticompetitive and wasteful". 

Remember the recent horror when Ford announced they were closing their Transit production facility and transferring it to Turkey, having just received a £10million handout less than one week before they announced the closure. Explicit subsidies to corporations foster inefficiency and uncompetitiveness in private and public enterprise. 

Often the government does not even have to provide cash. An endorsement of a company is enough to carry massive benefits to the recipient. Some UK banks have 'Too Big To Fail' status bringing them massive implicit subsidies. These same banks reap massive profits because of their TBTF status and the additional risk they carry because management knows government can always bail them out if it all goes wrong. 

Government creates moral hazard when one party to a contract takes advantage of asymmetric information to act in a manner inimical to the interests of the other party. Looking at UK banking again, we see moral hazard created through asymmetric information provided by government passing TBTF status to some banks and excluding others. The government then wonders why distortions in the banking market create a lack of competition and embarks on generating more regulation to fix the problem. Many industries face moral hazard where government involvement means government sponsors excessive risk taking or poor management while taxpayers pick up the tab if things go wrong. That kind of moral hazard is not just harmful, it is wrong.

The EU's tariffs are daylight robbery

One attractive aspect of an EU exit would be the exit of the Common External Tariff. As Daniel Hannan has pointed out, the Single Market is more like a customs union than a free trade bloc. All goods coming into Britain from outside the EU are subject to tariffs, designed to protect European industries from cheaper competition.

Unlike VAT, which isn’t levied on essentials (although I’m not sure I like the idea that beer and wine aren’t essentials), the tariffs are highest on things like food and clothes. (Courtesy of the WTO, here is a list of goods affected by the Common External Tariff.)

There’s a 16% tax on bananas from outside the EU, a 17% tax on trainers, 12% on stoned fruit like peaches and plums, and 12% on shirts, suits, coats and school uniforms. Cars are taxed at 9.7%. Twine and string get a 9.2% hit. Knitted gloves carry an 8.8% tariff whereas non-knitted gloves are hit by 7.6%. You name it, they tax it.

The loser is the consumer. On its own, the European cucumber industry (protected by a 12.8% tariff) might not be very influential, but any threat to a tariff causes businesses and their lobbyists to circle the wagons.

The 'bra wars' ended with European consumers paying more for Chinese underwear – not because Big Brassiere is unbeatable, but because related industries recognised that, individually, they would fall, and marshalled their political representatives into action.

The most perverse part is that if we got rid of all these tariffs, many, if not most, producers would be better off too. They are consumers as well as producers, and tariffs make the inputs they use (like steel – 2.7%) more expensive. But they face exactly the same collective action problems as consumers at large do.

The old public choice problem holds: free-riding is more costly for members of small interest groups than for members of big ones. Ostracism from trade associations, and so on, is much easier (and more harmful) for firms that don’t go along with the lobbying. Unfortunately, there aren’t many people who will ostracise their fellow consumers for failing to renew their subscription to the Adam Smith Institute.

The public choice problem in politics is often overstated. Most of the people who march against austerity really do think the cuts are bad. Most of the people who want to keep out immigrants really do think that they’ll cost them jobs. And, no doubt, most people who support tariffs really do think that protecting native industries is a good idea.

But voters are not as aware of the Common External Tariff as they are of many other issues. It isn’t clear what the ‘left-wing’ position on taxing cheap clothes from China ought to be, nor the 'conservative' position on exposing native industries to the free market. It’s hard to escape the impression that the Tariff really is an example of businesses hijacking democracy. The External Tariff represents one of the biggest swindles of modern times: a collective theft from consumers by politically powerful producers.

More Mill

It's not just the tyranny of our elected rulers that we have to guard against. We must also guard against the exploitation of minorities by the majority and of the stifling tyranny of political correctness. As John Stuart Mill puts it in the early pages of On Liberty:

Protection…against the tyranny of the magistrate is not enough; there needs protection also against the tyranny of the prevailing opinion and feeling; against the tendency of society to impose…its own ideas and practices as rules of conduct on those who dissent from them…. There is a limit to the legitimate interference of collective opinion with individual independence; and to find that limit, and maintain it against encroachment, is as indispensable to a good condition of human affairs, as protection against political despotism.

Adam Smith Institute ranked among top 10 economic think tanks in the world

Today, the University of Pennsylvania has released its authoritative Global Go To Think Tanks Report’s rankings of over 6,500 think tanks. The Adam Smith Institute is delighted to be placed 7th in the world for domestic economic policy and 10th for international economic policy.

These rankings place us in the same league as think tanks with budgets a hundred times bigger than ours. They confirm that we make a big difference, are highly cost-effective, and have earned the respect of our peers around the world. We were also named as the think tank with the 18th most significant impact on public policy in the world.

These rankings for 2012 confirm the Adam Smith Institute as one of the world’s leading policy think tanks, effectively fighting for free markets and a free society. 2012 has been an exceptional year and the impact of our work is reflected in our excellent position in the global rankings.

"This is a marvellous endorsement of our young, focused, energetic team, who have outperformed much larger institutions in terms of impact and cost-effectiveness", said Adam Smith Institute Director Dr Eamonn Butler. "I am proud to work alongside them in one of the world's leading policy think tanks."

The full report and rankings can be viewed online here.

Ayn Rand and the Free Market Revolution

The Adam Smith Institute hosted a book launch on Tuesday at St. John’s Church at Smith Square, London; a paradoxical venue to invite Dr Yaron Brook, the president of Ayn Rand Institute, the advocate for Objectivist philosophy, to talk about his new book co-authored with Don Watkins Free Market Revolution: how Ayn Rand’s ideas can end big government.

Church halls are not probably the best venues to host a movement of committed atheists, for atheism is the epistemological foundation of the Objectivist movement that many people tend to glance over, including the US vice presidential candidate Paul Ryan.  This is where, in principle, I have to part company with Objectivism, for I am a believer.  It would be wrong of me to promote a movement that argues against my fundamental belief in God.

Having said this, however, there is much in Ayn Rand’s philosophy that appeals to the advocates of free markets and small government, of which I am one.

Dr Edward Younkins writes about Objectivism:

Hierarchically, philosophy, including its metaphysical, epistemological, and ethical dimensions, precedes and determines politics which, in turn, precedes and determines economics. Rand bases her metaphysics on the idea that reality is objective and absolute. Epistemologically, the Randian view is that man’s mind is competent to achieve objectively valid knowledge of that which exists. Rand’s moral theory of self-interest is derived from man’ s nature as a rational being and end in himself, recognizes man’s right to think and act according to his freely-chosen principles, and reflects a man’s potential to be the best person he can be in the context of his existing circumstances. This leads to the notion of the complete separation of political power and economic power – that proper government should have no economic favours to convey. The role of the government is, thus, to protect man’s natural rights through the use of force, but only in retaliation and only against those who initiate the use of force. Capitalism, the resulting economic system, is based on the recognition of individual rights, including property rights, in which all property is privately owned.  For Rand, capitalism, the system of laissez-faire, is the only moral system.   

There is little that a proponent of a free market system can disagree with here.  And, as Dr Yaron Brook emphasised last night, our society has become increasingly collectivist.  No longer is the economic benefit of a man’s self-interest celebrated; rather, it’s condemned.

No longer is the economic contribution of an entrepreneur such as Bill Gates celebrated. Dr Brook was absolutely correct in his analysis that Bill Gates’ contribution to the betterment of the lives of countless people through Microsoft have been ignored or even berated for the fortunes he amassed through his entrepreneurial genius; it’s only now when Bill and Melissa Gates’ Foundation is giving the fortune away, that Bill Gates gains the ‘stamp of approval’ as a good guy by the masses.  The same analogy applies to the late Steve Jobs of Apple, and dare I say, Mark Zuckerberg of Facebook and countless other successful entrepreneurs.

Interestingly, Mr Jobs, when challenged about the ‘lack’ of his philanthropic activities, stated that his contribution to the world were his beautifully designed products that people lust after.  He was quite right, but not what the masses wanted to hear.  On the contrary, Apple, Google, Starbucks, Amazon etc. have been condemned as profit-crazed global thieves by the same people whose lives these firms have enriched.  Instead, governments, that impose taxes and make decisions on our behalf what to spend our hard-earned cash on, are applauded as altruistic institutions.

Poppycock. If I don’t like what Starbucks, or any other firm for that matter, sells, I can take my business elsewhere, but it’s very difficult for me to take my business away from the British taxman as a British subject.  And this is where the economic philosophy of Dr Brook and Watkins comes in. It is a refreshing perspective that argues for the return to the individual moral high ground against the collectivist coercion by the state.  It is time again to start celebrating wealth creation; this only comes if we, as a society, make a fundamental transformation from collectivism to moral individualism.

Ayn Rand’s Objectivist philosophy and its proponents have much to contribute to the movement for small government and the man’s freedom to choose.  Free Market Revolution makes an important contribution to the debate; even if one does not accept the ontological and epistemological foundations of Objectivism.

Merge audit and compliance in financial services

In terms of employment growth, regulation must be the UK’s most successful enterprise.  And we have been attempting to export it worldwide.  The 4,000 strong Financial Services Authority (FSA) has now been divided into two main successors, the Prudential Regulation Authority (PRA), made part of the Bank of England, and Financial Conduct Authority (FCA), and a few minor ones.  Hydra-like we can expect the combined total employment by the new bodies comfortably to exceed that of the FSA.

A couple of ironies here are firstly that financial services regulation was handed over to Brussels by Prime Minister Brown in 2009, leaving all these UK bodies merely with supervision of the rules set by the EU.  Secondly, the level of malfeasance by banks in particular has grown in proportion to the numbers of regulations and regulators.  The more regulators and regulations we have, it seems, the worse the banks behave.  Part of the explanation is that the regulators have been incompetent at worst and invisible at best.  If you doubt me, see the comments this month by the Commons Treasury Committee about the appointment of the new Chairman of the FCA.

And talking of invisibility, where were the auditors when this naughtiness was taking place?  Auditors are theoretically employed by shareholders but, in reality, by the directors of the companies they audit.  So you do not get a lot of auditors reporting that the directors are up to no good or turning blind eyes to practices they should be correcting.

To return to the issue of the numbers employed, the number of regulators, or regulatory supervisors, is not of much interest to a government which is cutting the size of the civil service (good) but recharging all the financial services regulatory staff costs back to the firms in the sector.  Pontius Pilate was no better at hand-washing.

And the number of external regulatory staff is only a fraction of the total, arguably one third.  The firms themselves have myriad compliance officers infiltrating the veins of the business and taking up the time of those managers trying to run it.  The upside of that is that the better the internal compliance system, the less need there should be, in terms of person-hours, for the involvement of the external supervisors.

Much the same applies to internal audit: the better job they do, the less the audit fees should be.

But what, when all is said and done, is the difference in roles between external and internal auditors on the one hand and regulatory supervision on the other?  Would it not be better to have fewer people combining audit and compliance and doing it properly, rather than the legions now employed and failing?  And let us prohibit directors from appointing their own watchdogs, or rather poodles.  A joint appointment committee of shareholders and PRA would give the audit/compliance team true independence.