Bashing banks


I was meant to go on Radio 4 on Friday to talk about whether the government should force banks to pass on interest rate cuts to customers. In the end another story took its place, but here's what I would have said.

The banks are being pulled in two ways by the government. They've been told they have to become financially stronger and rebuild their asset sheets, and that's what they're doing.  But now the government wants them to lend more too – which it's doing for popular consumption rather than any business reason.

The government shouldn't be micromanaging banks. Bankers know they have to consolidate their businesses, so that we can trust them in the future, and that's what they're doing.

Plus, the banks probably figure more people are going to default on their mortgages, but now the government is forcing them, effectively, not to foreclose. So they need some padding to get through that. It may be bad for borrowers now, but it is good for the financial sector in the long term.

One big problem is that there's now much less competition in banking because recent forced mergers and acquisitions has reduced it. In the long run, we'll need much more competition in the sector because that will put more pressure on banks to operate efficiently and give customers the very best deal. A few well-managed banks have already passed on the cut. It's the others who have to rebuild themselves that haven't.

Ultimately, it's just not for the media or politicians to tell people how to run their businesses. If there is proper competition, customers will be protected. In a free market, you can choose a different institution that doesn't charge so much.

Blog Review 802


Something a little strange is happening in the unemployment figures. More men than women are losing their jobs.

Of course, the absolute number of jobs lost in the US was very high: but then so was the absolute number of people in work.

Another case of when tax rate rises don't actually mean tax income rises.

More information on the nature v nuture debate: nature seems to count for quite a lot.

Are we absolutely certain that now is the time to reduce the transparency of the banking system?

Looking for someone to blame? How about this list of all rulers everywhere since 1700? Should do as a start, no?

And finally, perhaps psychics might forsee that trying to scam those who expose psychics might not be a good idea?


Might we have gone a little too far?


As has been endlessly pointed out before WWI the average Englishman could live out his life having no more interaction with the State than that afforded by the postman and the local policeman. Some of the additions since then have indeed been worthwhile but I'm not sure that we can say that of all of them. Yes, I know this is from the Daily Mail but still:

The Solankis were found guilty of failing to comply with the bylaw and now have a criminal record. They were given a six-month conditional discharge.

What dark crime could they have committed for a conditional discharge to hacve made the national newspaper?

A Cambridgeshire bylaw states that all paperboys must have a work permit issued by the council and signed by the child's employer, headteacher and parents. Working children must also be over 13 and cannot start work until after 7am.

Had they been employing those underage? Or perhaps forcing them to work long before dawn?

All the boys concerned were between 13 and 16. Other than not having the correct paperwork, they were working legally.

So no, nothing terrible going on.

Prosecutor Simon Reeve told the court that the couple ignored letters and visits from a child employment officer. He said that although eight applications for work permits had been sent to the children's school, only three were signed.

They had even tried to comply with the paperwork.

Cambridgeshire County Council used the controversial Regulation of Investigatory Powers Act (RIPA) to spy on eight paperboys thought to be working without permits. It sent undercover council officers to lurk outside a Spar in the village of Melbourn and take notes on the movements of the boys.

To uncover this terrible breach of all that makes a society holy and worth preserving council officers used anti-terrorism laws and (one assumes that if they were undercover they had to wear disguises, which is amusing and at 7 am they were on overtime which is less so) staked out the local newsagent. All to discover that voluntary exchange was going on without their permission.

Yes, I know that pre-WWI world isn't coming back and I'm entirely happy with many of the innovations since then, unemployment pay, State old age pensions and the rest. But might I just float the suggestion, that while the law is the law the law can also be an ass, that we've gone too far and ought to be retreating, not advancing, the State's control over our lives?


Sarko's madcap plan


Like Baldrick, French president Nicolas Sarkozy has a cunning plan. He's going to give €1000 to anyone buying a new car (assuming their old one is more than 10 years old, and they opt for an environmentally friendly model).

First of all, it strikes me as barmy for a government to borrow money, ramping up its budget deficit in the process, and then give it to people to spend on cars. What this really amounts to is future taxpayers subsidizing current taxpayers’ new cars – and it’s hard to see how any rational person would regard that as a good thing. Indeed, even Patrick Devedjian, the general secretary of Sarkozy's own party, the UMP, is against the idea.

It’s not going to do anything to boost the economy either – it will just encourage money to be invested in unproductive sectors. It’s true that car manufacturers are suffering, and maybe this could help them temporarily – but only at the expense of other areas of the economy. In the long run, the auto companies would be far better off restructuring than relying on government subsidies anyway. It's instructive to note that Sarkozy's idea is hardly new: they've already tried it three times, in 1994-5, 1995-6, and in 2007. And if it didn't work then, why should it work now?

Sarkozy could actually make a far greater difference to French industry if he got round to tackling the high taxes and restrictive labour laws that make it so difficult for French companies to compete in global markets. He did win the presidency promising a rupture with the past, after all.

Arguing about apprentices


Apprenticeship schemes can be beneficial to the labour market, and in turn the economy as a whole. If run efficiently and led by firms they can produce highly skilled young people with a higher degree of specialisation in their field. This helps promote high quality domestic industries.

The reason these schemes tend to work is that firms know that they are investing in high quality staff who can be nurtured to suit their needs, creating a reliable and efficient workforce. So when the quality of the apprenticeship schemes becomes questionable, the entire system is undermined. This is the problem with the governments interference by proposing a quota of 400,000 places to be on offer by 2020.

By producing such a quota, the government is effectively artificially boosting the supply within the market for apprentices, consequently devaluing the benefits they bring to firms and the economy. By ensuring that there are always places available on these schemes, the government is disincentivizing young apprentices, making the market less competitive. The government needs to be aware of possible unintended consequences that could harm the long-term interests industry.

As this article says, these targets are facing some stiff opposition and may not actually come into play. Let's hope so. Apprentice schemes should be left in the hands of the private sector. Ultimately, they know that if they invest in young employees, educating and training them, they will reap the rewards later on.

Blog Review 801


If the manipulation of your model leads to conclusions that are near insane, shouldn't you be questioning the value of your model?

Very odd behaviour leading to a rather excellent project outcome.

We can tell that the recession really is happening, yes.

The problems with unions don't come only from pay rates: the inflexibility, the job demarcations can be just as damaging.

It would appear that bubbles are inevitable, just something that're innate in the human mind.

There's been good news and bad news over the past week.

And finally, the economist with the gripping hand, a new currency idea and why did the chicken cross the road?

The economists' toolbox


There's two ways of looking at neo-classical economics. The first is as a coherent series of stories and assumptions about the way that the world works. I certainly hold that view. However, there's another, looser, sense which many more people would agree with. People like Dani Rodrik for example might not agree that those stories and assumptions explain the world (or at times that they are coherent) but neo-classical economics still provides the economist with a toolbox with which to explore the value of certain policies. In this view the value is in the methods rather than the assumptions.

The value of this can be seen in the current discussion of daylight savings time. It's long been an assumption that the move saves energy. Thus most governments promote it and there's even a move here in the UK to move to double summer time so as to save even more energy. The question we would really like the answer to though is whether summer time (or daylight savings time, same difference) does in fact save energy? Just because governments have been assuming it does for a long time doesn't make it so.

Which is what has just been done using the economists' toolbox: an empirical study of whether advancing the clocks saves energy. Something which is actually a little more difficult than you might think. We can't compare a year with savings with a year without as cloud cover and temperature could have varied making accurate comparison impossible. We can't compare areas with and those without for the same reasons. But Indiana had a strange system whereby some counties daylight saved and others did not and then it became statewide that they did. So we can compare the same places with and without and the same (almost) geographic areas with and without. The result?

A final component of our analysis is the calculation of costs associated with the estimated effect of DST. We find that the policy costs Indiana households an average of $8.6 million per year in increased electricity bills. We also estimate social costs of increased pollution emissions due to the residential response to be between $1.6 and $5.3 million per year.


DST leads to more energy use, not less. So I guess that idea of double DST as a way to curb climate change isn't going to work either then?

Does not accept


And that's most certainly the attitude that the government will take in relation to a ruling from the European Court of Human Rights. The ECHR unanimously passed judgement in favour of DNA and fingerprints not being retained if persons had not been charged or indeed acquitted of committing a crime. Their decision was based on the fact that the actions of the police violated Article 8, the person's right to respect for private life. And of course the Home Secretary Ms Smith rolled out the usual utterances post-verdict, "disappointed with the verdict" and that, "the existing law will remain in place while we carefully consider the judgement".

We have long held that the police are wrong to retain the details of innocent people. Indeed the current DNA database contains the details of some 4.1million people, of which 730,000 people were never charged with any offence. And then there are the children (though some have obviously committed crimes): more than a million under 16-year olds are now on there as well. Of course to err is human, but to retain the details of the innocent merely presumes that they are guilty of some, as yet, uncommitted crime. This ECHR's ruling is welcome (although we shouldn't have to rely on them), but more needs to be done to hold back this tide of totalitarianism.

It may not be the conventional view, but I regard this government is truly socialist – which is reflected in the way it has viewed and treated the realm of privacy. It has pushed back the boundaries and assumed that all we do, know and hold dear, is really theirs. To them we are nothing more than state agents.  We should not be surprised to see that this ruling will be ignored and new legislation will be introduced that comes up with more disingenuous reasoning as to why our DNA are belongs to them!

Cheerio, ASI


After eight weeks of working with the wonderful members of the ASI team, it is time for me to say farewell. It has been a great experience working for the Adam Smith Institute, and I have learned more than I ever thought I would in such a short amount of time.

While doing research and writing about current events, I have gained a much clearer understanding of both the important issues in British politics and the Libertarian outlook on them.  Never in my life have I heard so much about the free market and privatization, but all this talk has helped me realize the value of competition and choice in business. I will bring this new appreciation with me as I return to the US to complete my Bachelor’s degree in Economics at Fordham University in New York City.

It has truly been a pleasure interning at ASI. I wish everyone at the organization the best of luck with all of their upcoming projects and publications. I look forward to seeing how the Adam Smith Institute will impact the policy agenda in the future.