The wrong question

The Liberal Democrats are the latest ones to come up with the wrong answer by asking the wrong question.  They announce (but are unlikely to get) a mansion tax, taxes on wealth, and an additional 100 tax inspectors to scrutinize the returns of "the rich."  They think the question is "How do we get well-off people to pay more taxes?" 

Others have tried to blur in the public mind the important distinction between ordering one's affairs to minimize tax liability, using the provisions the state has allowed for doing so, and not declaring one's income honestly in order to escape paying taxes on it.  The former is tax avoidance and is legal, the latter is tax evasion and is not.

The aim of the people who advocate these things is to raise taxation by having high earners pay more.  Rather than simply raising the rates, as some argue for, the additional aim seems to be one of having HMRC aggressively re-interpret the rules so as to gain more revenue from the existing rates.

The whole question is misconceived.  Instead of asking, "How do we get well-off people to pay more taxes?" we should be asking, "How do we get talented and creative people to generate more business, more growth, and more jobs?"  If they do that, they will broaden the tax base and generate more revenue for the Exchequer, although it will be a smaller proportion of the total economy.

Several studies have shown that government wastes billions of pounds every year on things it does badly and things it should not be doing at all.  Instead of trying to extract more money from successful people to fund this wastage, they should be trying to prevent it happening in the first place.

New attacks on successful people are likely to drive some of them abroad, and to prevent others like them from setting up business in the UK.  We should not be trying to squeeze more revenue from them for government spending, we should be lowering the taxes and regulations that act as disincentives for business development and expansion.  It comes as no surprise that when people ask the wrong question they end up with the wrong answer.

Junk statistics on the carrier bag charge

I was intrigued by an interview on Sky News last week with Tamsin Omond, an environmental campaigner from Climate Rush. A keen supporter of levying a 5p charge on plastic carrier bags, she claimed that in Wales—where such a law has been in force since October 2011—“use of these bags has fallen by 95 per cent.”

This is a remarkable and barely believable statistic and the Sky presenter looked suitably sceptical (see video below from 3 minutes in). “It fell by 95 per cent?!? Over how long a period?” Osmond replied that “because it’s only been in place for a quarter of the year, use fell by 22 per cent over the last quarter...” “So you extrapolate that through?” “Exactly.”

Hmm. That’s quite an extrapolation. If we look at the figures, we can see that the average number of plastic bags used in Wales fell from 9.7 per person in 2010 to 7.6 per person in 2011. This, indeed, is a drop of 22 per cent. Such declines are not unprecedented. Plastic bag use fell by 22.5% in England in 2008, for example (presumably because of the credit crunch), but since Wales was the only part of the union to record a significant fall in use in 2011, it is reasonable to assume that the plastic bag charge played a role.

But does this equate to a 95 per cent reduction overall? To reach this figure, the campaigners have assumed that there was no decline in plastic bag use until the 5p charge came in on October 1st. If so, the annual rate could only have fallen by 22 per cent if the last quarter saw plastic bag use plummet by 95 per cent. They further assume that plastic bag use will remain at a five per cent of the pre-levy rate throughout 2012 and forevermore.

This logic does not stand up to scrutiny. Firstly, the basic maths is wrong. If the levy introduced in the final quarter was responsible for the entirety of the 2011 drop, it would mean an 88 per cent decline in that quarter, not 95 per cent. This would be nit-picking if the other assumptions were sound, but they are not. There is no reason to believe that plastic bag use was not already declining in the previous quarters. In the months running up to the 5p levy, the government, shops and the supermarkets informed the public that the charge was about to be introduced and it is fair to assume that people were already being weaned off free carrier bags to some extent before October 1st.

Moreover, the last quarter of the year is not a typical retail period. The pre-Christmas period is the food and retail sector’s busiest time (see graph below from the Office for National Statistics)  and, therefore, it is the period in which a disproportionately large number of plastic bags are consumed. Doubtless, the plastic bag levy led to fewer bags being used between October and December, but it is wrong to assume that the decline in the absolute number of bags used will continue during quieter shopping months when fewer bags are used overall. That, however, is exactly what campaigners have done.

Looking at the survey data, it seems clear that the 5p levy did not lead to a 95 per cent reduction in plastic bag use, nor anything close to it. Figures from the British Retail Consortium show that “the number of shoppers [in Wales] who said they had used their own bags on their last supermarket trip rose from 61% in September 2011 to 82% by April 2012.”  In other words, the number of people who didn’t use their own bags in supermarkets fell by half. This is all well and good, but it is some distance from 95 per cent. Research from Cardiff University found that “the number of people who always take their own bags when shopping rose in Wales from 27% (42% in supermarkets) before the introduction of the charge to 43% (64% in supermarkets) afterwards”. This is an increase of about 50 per cent and many would applaud it, but it is not congruent with the claimed 95 per cent drop in plastic bag use.

None of this is intended to suggest that the Welsh policy is necessarily misguided. Clearly, there has been a marked decline in plastic bag use which many would welcome. Equally, we know that such laws have unintended consequences, such as the tenfold increase in the sale of black bin bags in Ireland after similar legislation was introduced in 2002. The point is that policy should be based on sound evidence rather than hyperbolic claims from special interest groups. It is easy to bandy impressive figures around, but when one digs a little deeper, they often turn out to be built on weak foundations. Time will tell what effect the Welsh levy has had, but the available evidence suggests that the 95 per cent figure is a junk statistic based on dodgy mathematics and unsound assumptions which should not be taken seriously.

We're all poorer than we need to be: because government

It's one of those definitional little things that causes such problems when you start to unravel it. How do we measure the influence of government spending upon GDP?

The problem is that it's exceedingly difficult to really measure the value of some to all of the things that government does. Thus we simply assume that the effect on GDP of government spending is the amount of that government spending. This is one reason why the Keynesian prescription that the way to raise GDP is to increase government spending "works". Because that's how we've defined it at the start.

However, there are, as we've all noted, certain inefficiencies in having things carried out by the men with clipboards. The accretion of stultifying bureaucracies that market based systems would sweep away. How big is that inefficiency? An interesting paper from the World Bank:

There are obviously glaring differences in the efficiency with which governments spend money on health care, education, roads etc., not only over time in a country, but also among countries. Therefore, as absenteeism of teachers and health workers, overruns in costs of building roads, and other aspects are not taken into account, directly comparing the government part of GDP -- and thus total GDP -- among countries may be misleading. Generous wage raises in the public sector may even be straightly counted as increases in productivity.Grigoli and Ley conducted an interesting exercise. Using indicators of government expenditure inefficiency ("waste") in health and education for a group of 24 countries, and using one of them (Singapore) as a benchmark for best practice, they corrected the other GDPs accordingly to gauge how misleading it is to compare figures obtained through conventional methodologies. On average, meaningful GDP figures should be 4.1 percent lower, with the loss associated with wasted public resources reaching 7.8 percent in Portugal.

4% of GDP is a pretty large number. Near £60 billion: we're collectively poorer by that much here in the UK because we let government run the health and education sectors. Which indicates that it's pretty much a free lunch in getting them to be more market orientated, isn't it?

Yes, I know, there is no such thing as a free lunch: but this is only true when we do not have inefficiency in the system. The eradication of inefficiency is in fact  that free lunch which does not exist.

Cable's business bank is a terrible idea

Business Secretary Vince Cable wants to establish a state business bank to lend to small and medium-sized enterprises. This idea will do business no good, will mess up the finance market, and saddle taxpayers with yet more cost.

There are three reasons why businesses are not borrowing. First, having found themselves overstretched when the crisis hit, they are now doing the right thing and – unlike Mr Cable's government – reducing their debt. The existence of a state business bank is not going to change that.

Second, times remain very uncertain and many firms cannot see many good projects to invest in, so are not actively seeking finance. A state business bank is not going to change that either – though a growth policy of major cuts in regulation and business taxes might.

Third, some SMEs that would like to borrow cannot get credit because the government has told their banks not to take so many risks – and SMEs are inherently risky enterprises. A business bank would simply pass these risks to the taxpayer. And taxpayers have already paid enough.

It is astonishing that Mr Cable believes that he and his civil servants know what SMEs have viable business plans that deserve finance better than professional lenders and investors who live by making these decisions every hour of every day. The only result will be the establishment of a vast new state organisation with all the efficiency of the Post Office, and more bureaucratic control and regulation of the capital markets on which economic growth depends.

Ineptocracy

Just how unequal is the United States?

The US Census has released its update to the figures for inequality in the country. There's the usual sort of reporting about it, including comparisons to inequality in other countries. I've written elsewhere about how this is entirely silly. The US numbers are before taxes and redistribution, everyone else's numbers are after it. Given that redistribution does, umm, change the distribution of income we shouldn't be surprised that the results of the distribution of income are different when measured before and after such redistribution.

But there's one more point that we should consider. Is the US actually more unequal than the European Union? The two economies are about the same size, similar sorts of numbers of people. Yes, 300 million to 500 million, but that's a more sensible comparison than 300 million to the 9 million in Sweden. What I found was that Eurostat itself doesn't, at least as far as I could find, answer the question. What they give is the inequality (or Gini) for each country then just average them. That's not at all the same as the US number, which is inequality among all 300 million of them.

Fortunately, others seem to have done the work. Branco Milanovic for example, who is the World Bank's go to guy on this subject:

The EU27 has caught up in inequality with the United States because of the enlargement towards the Eastern areas of the continent which have significantly lower mean incomes. Thus, in 2007, after Bulgaria and Romania (and previously eight other post-Communist countries) became members of the European Union, the EU-wide Gini coefficient (across all individuals in the area) reached 41 points which is about the same as the Gini calculated across all individuals in the United States. The difference however is that in the former case, most of inequality is driven by mean income differences between the member-states. If we take EU15 the Gini coefficient is only 33, about the same as the median Gini of the fifteen countries and significantly less than US inequality.

That's not entirely and wholly true I think. The post tax and post benefits Gini for the US is more like 38 than 41. And we are definitely talking about post tax post benefit because for market incomes alone many EU countries are alone, let alone across all of them, more unequal than the US.

But even if we ignore those niggles I think that's an interesting result, don't you? The European Union is around and about as unequal as the United States is. We have vast tax burdens and redistributive programs to reduce inequality, in a way that the US doesn't, yet inequality is about the same across the two near continents.

Yes, I'm entirely aware that this isn't an entirely and completely fair comparison. But I do still think that it's an interesting result.

Thankfully there's too few Bristol pounds to do any damage

The loons over at the nef (yes, this local town money comes from them) have managed to get another group of cultists to sign up and create the Bristol pound:

More than 300 businesses – including butchers, bakers, solicitors, plumbers, electricians, book stores, art galleries, a chimney sweep, supplier of firewood, even a pole dancing tutor – have signed up, making the Bristol pound the largest local currency in the UK.

The idea is simple: to encourage consumers to spend more of their money in the local independent shops that accept the one, five, 10 and 20 pound notes and stop money leaking out of the area to faceless multinationals, unknown shareholders or the discredited banking system.

They really are missing the point of this money thing, aren't they? It's so that one can in fact deal with faceless multinationals and unknown shareholders. If all you wanted was a small local economy that didn't trade with anyone outside a couple of miles all you need is some exercise books in which to keep a set of credits and debits. The whole and entire point of using "money" to trade with is to establish something that can facilitate trade with those you don't know and don't know whether you can trust. So I rather think they've missed the point.

What's worse of course is that by limiting trade to a specific area you've limited people to trading for what is produced in that limited area. Which agains isn't the point at all. Once we've accepted the very idea of the division and specialisation (and anyone who has seen a home made bookcase knows that's a good idea) of labour then the only logical boundary to the resultant trade is the entire world. And even that's only because of the absence of anyone anywhere else to trade with.

But fortunately this scheme, for all the column inches The Guardian will give it, is too small to actually damage very much.

The company (motto: Our City, Our Money) has made available £125,000 worth of the currency and thinks in excess of £500,000 will be in circulation by this time next year.

Looking at the Bank of England figures we seem to have £60 odd billion of notes and coins supporting our £1,400 billion economy (rough numbers you understand). So we seem to have around and about a 25 to 1 relationship between economic activity and the physical geld needed to grease it. £500k of this new money will thus support some £12.5 million of economic activity in Bristol over the year. The economy of Bristol is perhaps £9 billion a year at present. We're thus talking about an incredible 0.1% or so of the economy.

So, not really capable of doing much damage to anyone and at least it keeps the hippies happy, eh?

Mitchell and the decline in politics

The new Chief Whip of Britain's Conservative Party, and former Police Minister, Andrew Mitchell MP, had something of an altercation the other day with the police at the gates of Downing Street. The Chief Whip, of course, has an official home in Downing Street, so he probably knows the cops there pretty well. There he was on his bike, trying to leave, but the police wouldn't open the main gate for him. Their job is security, and they like to keep our politicians nice and safe, so they suggested he use a side gate instead. At which point, unfortunately, he lost it, and let off a stream of abuse against the officers.

Shocking, you must agree. But what is even more shocking is how this story seems to have occupied the headlines and the lead slots on the TV and radio news for the last day and a bit. Various opposition MPs and police trade union leaders say the Chief Whip should resign. Commentators have been asking government ministers whether they are not shocked too and whether they agree he should resign. Were Parliament in session, various members would probably be tabling motions even as you read this.

It is a small example of the decline of our politics, and indeed our laws. Police officers are well used to being on the receiving end of ripe remarks, as are most workers who have to deal with customers and the general public, particularly if those customers and members of the public are in a rush or frustrated about something. Police who work in the Palace of Westminster say they are well used to the rudeness of MPs. It's a high-pressure job, and MPs are – well, let's say confident about their own importance. The sensible reaction is to ask the person to exercise some restraint, and then forget it. We all have these moments of frustration. But here, there are two differences.

First, politics dominates our lives, thanks to the 24-hour news schedule and the proliferation of print, broadcast and online media. Indeed, there is a self-promoting relationship between politics and the media. The media need juicy sensational news, the politicians need headlines, so each provides what the other wants. As a result, on almost every issue or indiscretion, no matter how petty, we get too many sensational claims, counter-claims, demands for resignations, expressions of outrage, and other posturing by self-promoting politicians. And too many media strories which take the reactions too seriously and as a result just magnify molehills as if they were mountains.

The second problem is more subtle. Our legislators have been so anxious to protect us from genuine abuse – racism, for example – that they have attempted to restrain us beyond our human nature. People do, on occasion, lose their temper. There is a difference, though, between incidents that should be settled with an apology and incidents that constitute a breach of the peace, or threaten violence. But politicians have drawn our laws, and are continuing to draw them, to reflect their notion of an ideal society, not a real one. They don't want us to smoke, or drink much, or eat fatty foods, or swear, or give other people a mouthful on occasion. These are 'unacceptable'. Well, being rude to other folk certainly is 'unacceptable' in a moral sense. But should there be a law against it? And if everyone who ever did it had to resign the job, how many of us would be in work at all? Laws and attitudes need to realise that the human beings they deal with are not perfect.

I just get so angry at this nonsense

Yes, I'm sorry, this is one of my little hobby horses. But the way people misuse statistics, most especially the US poverty numbers, really just does annoy me. Here's a piece from what I regard as a good man doing good work. But it still angers me deeply:

According to census data released Thursday, nationwide the number of people in poverty has grown to 48.5 million, or almost 16% of the population, the highest poverty number in the more than 50 years that it has been recorded. And while the data, although grim, appears to indicate the economy is slowly rebounding, it also provides some insight into what's working in our fight to feed the hungry, and what to expect in the coming months and years.

Food stamps work. According to the latest figures, food stamps lifted 3.9 million individuals out of poverty, including 1.7 million children, keeping food on the table for many families. Food stamps are working exactly as they should – effectively responding to the economic realities of the time. Without them, the emergency hunger relief network in this country could not cope.

Now the bloke who wrote that runs a food bank. I think poverty alleviation's a good thing and I think that voluntary collective action to alleviate poverty is a very good thing indeed. So I've no problem at all with what he or his organisation do: I think they're both admirable and praiseworthy. It is purely the juxtaposition of those statstics that angers.

For that 48.5 million in poverty number is before we take account of the 3.9 million lifted out of poverty by food stamps. As it is also before the number taken out of poverty by almost all of the other things that the US does to alleviate poverty. Like tax credits, housing benefits, medical care and so on and on.

Everyone, just everyone, looks at the US poverty numbers and says "but that's terrible!". Without understanding that they are the numbers before poverty alleviation. Unlike the numbers of every other country where they are after poverty alleviation.

And yes it is an important point. Whether you are of left or right, whether you think there should be more done or less. For currently one side can say "look, we're spending hundreds of billions curing poverty but we've got just as many poor people so let's just stop spending the money". The other can say "look, we're spending hundreds of billions curing poverty but we've got just as many poor people so let's just spend more and more money". Because no one at all is counting the effect of the money being spent. And that is important: for what everyone would really like to know is "how effective is the money already being spent and how much more/less should we be spending?".

Which no one ever does ask because of the near insane way that the US measures poverty.

Bank executives should face greater liability for losses

We released a report today, Market-based bank regulation: Creating incentives that promote responsible banking, which argues that a market-based alternative to orthodox bank regulation should be adopted to promote responsible decision-making behaviour by banks. The paper looks at the historical example of 19th Century American banks, where executives and shareholders faced liability for twice the value of their shareholdings. This double liability shareholding system led to lower failure rates and incentivised bank executives to limit excessive risk-taking. The author, Mikko Arevuo, argues that a variant of the system should be introduced today to discourage risky behaviour.

The report suggests two market-based solutions, both of which could make bank managers more responsible for losses. These are:

• Creating a special class of employee shares that become convertible to common shares at the prevailing market value after 5 years, at a rate of one employee share to one common share. Should the bank fail before the strike date, bank executives would be held responsible for the losses up to the value of their shares on the date they were received.
• Alternatively, attaching a restriction to executive bonus payments that make them subject to a ‘claw-back’ clause for a pre-defined period of time, up to 10 years.

For these proposals to be fair, they should be targeted only at those executives who have the power and authority to make decisions that have a material impact on the bank’s risk profile. As a result there would be greater managerial oversight over the risk-seeking activities of employees.

A move to these market –based solutions would re-align incentives to promote sound executive decision-making. This would be preferable to our current traditional capital adequacy based banking regulation, which has been unable to cope with the risk seeking behaviour of bankers and the moral hazard that is embedded in the modern banking system. The implicit promise of bailouts for failing banks holds taxpayers to ransom to cover losses incurred as a result of poor managerial decisions. Many of the current regulations have sought to restrict certain banking activities and set limits to executive compensation levels, which is unlikely to anticipate the causes of the next banking crisis.

Instead Market-based regulation would increase incentives for bankers to think seriously about the risk-return implications of their business decisions. This will be good for the financial services industry and would reduce the need for excessive micro-management and regulation of banking activities, while making executives at least partially liable for the costs that bank failures and losses impose on society.

Mikko Arevuo, author of the report, adds: “Public anger at the behaviour of banks and bank executives is fully understandable.  Taxpayers and voters, quite rightly, demand that something is done about irresponsible risk-taking and poor managerial judgment by executives.  However, the political default position of more regulation is a blunt instrument.  It will result in higher costs that banks will eventually try to pass on to their customers.  Moreover, an overly complex regulatory framework may result in the creation of risks that no one had predicted in advance, as banks try to find ways around the new regulations.   Finally, regulation is often a poor tool in changing human behaviour.  My paper was written to provoke debate about the role of regulation in changing managerial behavior. I believe that effective regulation should focus on incentivizing managers to behave in the interest of their firms’ key stakeholders, rather than focus on the institution level capital adequacy-based frameworks."

The report was covered in the Daily Telegraph and Money Marketing today.