A blanket ban on psychoactive substances makes UK drugs policy even worse

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It is a truth under-acknowledged that a drug user denied possession of their poison is in want of an alternative. The current 'explosion' in varied and easily-accessible 'legal highs' (also know as 'new psychoactive substances') are a clear example of this.

In June 2008 33 tonnes of sassafras oil - a key ingredient in the production of MDMA - were seized in Cambodia; enough to produce an estimated 245 million ecstasy tablets. The following year real ecstasy pills 'almost vanished' from Britain's clubs. At the same time the purity of street cocaine had also been steadily falling, from over 60% in 2002 to 22% in 2009.

Enter mephedrone: a legal high with similar effects to MDMA but readily available and for less than a quarter of the price. As the quality of ecstasy plummeted (as shown by the blue line on this graph) and substituted with things like piperazines, (the orange line) mephedrone usage soared (purple line). The 2010 (self-selecting, online) Global Drug Survey found that 51% of regular clubbers had used mephedrone that year, and official figures from the 2010/11 British Crime Survey estimate that around 4.4% 16 to 24 year olds had tried it in the past year.

Similarly, law changes and clampdowns in India resulted in a UK ketamine drought, leading to dabblers (both knowingly and unknowingly) taking things like (the once legal, now Class B) methoxetamine. And indeed, the majority of legal highs on offer are 'synthetic cannabinoids' which claim to mimic the effect of cannabis. In all, it's fairly safe to claim that were recreational drugs like ecstasy, cannabis and cocaine not so stringently prohibited, these 'legal highs' (about which we know very little) probably wouldn't be knocking about.

Still, governments tend to be of the view that any use of drugs is simply objectively bad, so the above is rather a moot point. But what anxious states can do, of course, is ban new legal highs as they crop up. However, even this apparently obvious solution has a few problems— the first being that there seems to be a near-limitless supply of cheap, experimental compounds to bring to market. When mephedrone was made a Class B controlled substance in 2010, alternative legal highs such NRG-1 and 'Benzo Fury' started to appear. In fact, over 550 NPS have been controlled since 2009. Generally less is known about each concoction than the last, presenting potentially far greater health risks to users.

At the same time, restricting a drug under the Misuse of Drugs Act 1971 requires evidence of the harm they cause (not that harm levels always bear much relation to a drug's legality), demanding actual research as opposed to sensationalist headlines. Even though temporary class drug orders were introduced in 2011 to speed up the process, a full-out ban still requires study, time and resources. Many have claimed the battle with the chemists in China  is one lawmakers are unlikely to win.

And so with all of this in mind, the Queen's Speech on Wednesday confirmed that Conservatives will take the next rational step in drug enforcement, namely, to simply ban ALL OF THE THINGS.

In order to automatically outlaw anything which can make people's heads go a bit funny, their proposed blanket ban (modelled on a similar Irish policy) will prohibit the trade of 'any substance intended for human consumption that is capable of producing a psychoactive effect', and will carry up to a 7-year prison sentence.

Somewhat ironically for a party so concerned with preserving the UK's legal identity it wants to replace the Human Rights Act with a British Bill of Rights, this represents a break from centuries of British common law, under which we are free to do something unless the law expressly forbids it. This law enshrines the opposite. In fact, so heavy-handed and far-reaching is the definition of what it is prohibited to supply that special exemptions have to be granted for those everyday psychoactive drugs like caffeine, alcohol and tobacco. Whilst on first glance the ban might sound like sensible-enough tinkering at the edges of our already nonsensical drug policy, it really is rather sinister, setting a worrying precedent for the state to bestow upon citizens permission to behave in certain ways.

This law will probably (at least initially) wipe out the high street 'head shops' which the Daily Mail and Centre for Social Justice  are so concerned about. However, banning something has never yet simply made a drug disappear. An expert panel commissioned by the government to investigate legal highs acknowledged that a 50% increase in seizures of Class B drugs between 2011/12 and 2013/14 was driven by the continued sale of mephedrone and other once-legal highs like it. Usage has fallen from pre-ban levels, but so has its purity whilst the street price has doubled. Perhaps the most damning evidence, however, comes from the Home Office's own report into different national drug control strategies, which failed to find “any obvious relationship between the toughness of a country’s enforcement against drug possession, and levels of drug use in that country”.

The best that can be hoped for with this ridiculous plan is that with the banning of absolutely everything, dealers stick to pushing the tried and tested (and what seems to be safer) stuff. Sadly, this doesn't seem to be the case - mephedrone and and other legal and once-legal highs have been turning up in batches of drugs like MDMA and cocaine as adulterants, and even being passed off as the real things.  Funnily enough, the best chance of new psychoactive substances disappearing from use comes from a resurgence of super-strong ecstasy, thanks to the discovery of a way to make MDMA using less heavily-controlled ingredients.

The ASI has pointed out somanytimes. that the best way to reduce the harms associated with drug use is to decriminalise, license and tax recreational drugs. Sadly, it doesn't look like the Conservatives will see sense in the course of this parliament.  However, at least the mischievous can entertain themselves with the prospect that home-grown opiates could soon be on the horizon thanks to genetically modified wheat. And what a moral panic-cum-legislative nightmare that will be...

Another sign of the looming apocalypse

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That Guardian opinion columns will have only a marginal relationship to economics, maths or even reality is well known. But it is possible to find signs of the looming apocalypse even there, knowing that point.

Are you paid what you are worth? What is the relationship between the actual work you do and the remuneration you receive?

The revelation that London dog walkers are paid considerably higher (£32,356) than the national wage average (£22,044) tells us much about how employment functions today. Not only are dog walkers paid more, but they work only half the hours of the average employee.

It is clear that the relationship between jobs and pay is now governed by a new principle. The old days in which your pay was linked to the number of hours you clocked up, the skill required and the societal worth of the job are long over.

There's never been a time when pay was determined by societal worth. Cleaning toilets is highly valuable societally: as the absence of piles of bodies killed off by effluent carried diseases shows. It's also always been a badly paid job. Because wages are not and never have been determined by societal worth. Rather, by the number of people willing and able to do a job at what price versus the demand for people to do said job at that price. You know, this oddity we call a market.

That a Guardian opinion column might opine that jobs should pay their social worth is one thing, to claim that the world used to work that way is an error of a different and larger kind.

We are surrounded by examples of this increasing disparity between jobs and pay. For example, average wages in western countries have stagnated since the 1980s,

And there's the maths error. For that's not true either. Yes, as we know, wages have been falling in recent years but according to both Danny Blanchflower and the ONS real wages are still, after that fall, 30% or so higher than in the 80s (median wages). 30% over three decades isn't great but it's also not to be sniffed at: and it's also not stagnation.

But we expect such errors from the innumerates who fight for social justice or whatever they're calling it this week. At which point we come to the signs of the apocalypse:

Peter Fleming is Professor of Business and Society at City University, London.

Actually, he's in the Business School:

Peter Fleming Professor of Business and Society

That long march through the institutions has left us with professors at business schools believing, and presumably teaching, things that are simply manifestly untrue.

Woes, society to the dogs, apres moi la deluge etc.

It's not a happy thought that this sort of stuff is being taught these days, rather than just scribbled in The Guardian, is it?

Torts and tortes

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It's pretty hard to lose weight. A lot of evidence suggests that waist circumference is heritable, with as much as half the differences between individuals down to genes. But this genetic explanation probably doesn't explain social trends towards obesity; surely there haven't been enough generations of heavier people having more kids than less heavy people (do they even have more kids?)

The issue gets weirder when we discover that animals living in human environments are also getting fatter, even lab rodents eating controlled diets!

Whatever the explanation for the macro issue, it's refreshing to note that on the micro level, people are still responding to incentives. After a big 2002 anti-McDonald's judgement 26 US states passed rules making it much harder to sue fast food companies for causing your weight gain. After this, people seemed to take more responsibility for their own weight and health.

This finding comes from a new paper, "Do 'Cheeseburger Bills' Work? Effects of Tort Reform for Fast Food" (latest gated, earlier pdf) by Christopher S. Carpenter,  and D. Sebastian Tello-Trillo. Here is the abstract:

After highly publicized lawsuits against McDonald’s in 2002, 26 states adopted Commonsense Consumption Acts (CCAs) – aka ‘Cheeseburger Bills’ – that greatly limit fast food companies’ liability for weight-related harms.

We provide the first evidence of the effects of CCAs using plausibly exogenous variation in the timing of CCA adoption across states. In two-way fixed effects models, we find that CCAs significantly increased stated attempts to lose weight and consumption of fruits and vegetables among heavy individuals.

We also find that CCAs significantly increased employment in fast food. Finally, we find that CCAs significantly increased the number of company-owned McDonald’s restaurants and decreased the number of franchise-owned McDonald’s restaurants in a state.

Overall our results provide novel evidence supporting a key prediction of tort reform – that it should induce individuals to take more care – and show that industry-specific tort reforms can have meaningful effects on market outcomes.

I'm not saying individual responsibility always works but maybe some of the blame for obesity is down to individual choice.

Well, yes and no Professor Krugman, yes and no

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The economics of this is of course correct For Paul Krugman is indeed an extremely fine economist:

We may live in a market sea, but most of us live on pretty big command-and-control islands, some of them very big indeed. Some of us may spend our workdays like yeoman farmers or self-employed artisans, but most of us are living in the world of Dilbert.

And there are reasons for this situation: in many areas bureaucracy works better than laissez-faire. That’s not a political judgment, it’s the implicit conclusion of the profit-maximizing private sector. And people who try to carry their Ayn Rand fantasies into the real world soon get a rude awakening.

The political implications of this are less so, given that Paul Krugman the columnist is somewhat partisan.

And of course that implication is that since that private sector (as Coase pointed out a long time ago) uses bureaucracy at times then we should all shut up and simply accept whatever it is that the government bureaucracy decides to shove our way.

Which is to slightly miss the point: yup there's command and control islands in that sea. Bit it's that sea that srots through those islands, sinking some and raising others up into mountains. Which is something that doesn't happen with the monopoly of government bureaucracy: they don't allow themselves to get wet in that salty ocean of competition.

That planning and bureaucracy can be the most efficient manner of doing something? Sure. That sometimes it's not? Sure, that's implicit, explicit even in the entire theory. How do we decide? Allow that competition. It's the monopoly of the government bureaucracy that's the problem, not that we somtimes require pencil pushers to push pencils.

RIP John Nash

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In a Think Piece for the Adam Smith Institute, Vuk Vukovic pays tribute to the endlessly influential theorist John Nash:

It is with great sorrow we hear that one of the greatest minds in human history died this weekend in a car crash with his wife while they were returning home from an airport. John Forbes Nash Jr., was widely known as one of the founders of cooperative game theory whose life story was captured by the 2001 film "A Beautiful Mind", is truly one of the greatest mathematicians of all time. His contributions in the field of game theory revolutionized the way we think about economics today, in addition to a whole number of fields - from evolutionary biology to mathematics, computer science to political science.

You can read the whole piece here

In memoriam: John Nash

It is with great sorrow we hear that one of the greatest minds in human history died this weekend in a car crash with his wife while they were returning home from an airport. John Forbes Nash Jr., was widely known as one of the founders of cooperative game theory whose life story was captured by the 2001 film "A Beautiful Mind", is truly one of the greatest mathematicians of all time. His contributions in the field of game theory revolutionized the way we think about economics today, in addition to a whole number of fields - from evolutionary biology to mathematics, computer science to political science. 

John Nash was born in 1928 in Bluefield, West Virgina. Even as a child he showed great potential and was taking advanced math courses in a local community college in his final year of high school. In 1945 he enrolled as an undergraduate mathematics major at the Carnegie Institute of Technology (today Carnegie Mellon). He graduated in 1948 obtaining both a B.S. and an M.S. in mathematics and continued onto a PhD at the Department of Mathematics at Princeton University. There's a famous anecdote from that time where his CIT professor Richard Duffin wrote him a letter of recommendation containing a single sentence: "This man is a genius". Even though he got accepted into Harvard as well, he got a full scholarship from Princeton which convinced him that Princeton valued him more. 

While at Princeton, already on his first year (in 1949) he finished a paper called "Equilibrium Points in n-Person Games" (it's a single-page paper!) that got published in the Proceedings of the National Academy of Sciences (in January 1950). The next year he completed his PhD thesis entitled "Non-Cooperative Games", 28 pages in length, where he introduced the equilibrium notion that we now know as the Nash equilibrium, and for which he will be awarded the Nobel Prize 34 years later. It took him only 18 months to get a PhD: he was 22 at the time. 

While at Princeton he finished another seminal paper "The Bargaining Problem" (published in Econometrica in April 1950), the idea for which he got from an undergraduate elective course he took back at CIT. It was Oskar Morgenstern (the co-founder of game theory and the co-author of the von Neumann & Morgenstern (1944) Theory of Games and Economic Behavior) who convinced him to publish that bargaining paper. The finding from this paper will later be known as the Nash bargaining solution.  At Princeton he sought out Albert Einstein to discuss physics with him (as physics was also one of his interests). Einstein reportedly told him that he should study physics after Nash presented his ideas on gravity, friction and radiation. 

Illness and impact

After graduating he took an academic position at MIT, also in the Department of Mathematics, while simultaneously taking a consultant position at a cold war think tank, the RAND Corporation. He continued to publish remarkable papers (his PhD thesis in The Annals of Mathematics in 1951, another paper called "Two-Person Cooperative Games" in Econometrica in 1953, along with a few math papers). He was given a tenured position at MIT in 1958 (at the age of 30), where he met and later married his wife Alicia. However, things started to go wrong from that point on in his personal life and career. In 1959 he was diagnosed with paranoid schizophrenia, forcing him to resign from MIT. He spent the next decade in and out of mental hospitals. Even though he and his wife divorced in 1963, she took him in to live with her after his final hospital discharge in 1970. 

Nash spent the next two decades in relative obscurity, but his work was becoming more and more prominent. Textbooks and journal articles using and applying the Nash equilibrium concept were flying out during that period, while most scholars that built upon his work thought he was dead. It was not only the field of economics - where the concepts of game theory were crucial in developing the theory of industrial organizations, the public choice school and the field of experimental economics (among many other applications) - it was a whole range of fields; biology, mathematics, political science, international relations, philosophy, sociology, computer science, etc. The applications went far beyond the academia; governments started auctioning public goods at the advice of game theorists, business schools used it to teach management strategies. 

Arguably the most famous applications were to the cold war games of deterrence that explain to us why the US and Russia kept on building more and more weapons. The Nash equilibrium concept explains it very simply - it all comes down to a credible threat. If Russia attacks the US it must know that the US will retaliate. And if it does, it will most likely retaliate with the same fire-power Russia has. Which will lead to mutual destruction of both countries. In order to prevent a full-scale nuclear war (i.e. in order to prevent the other country from attacking), the optimal strategy for both countries is to build up as much nuclear weapons as they can to signal to the other player what they're capable of. This will prevent the other player from attacking. If they are both rational (i.e. if they want to avoid a nuclear war and total destruction) they will both play the same strategy and no one will attack. Paradoxically, peace was actually a Nash equilibrium of the arms race!

Long-overdue recognition 

Little did Nash have from all this. He had no income, no University affiliation and hardly any recognition for his work. But this all changed in the 1990s when he was finally awarded an overdue Nobel Prize in Economics in 1994, with fellow game theorists John Harsanyi and Reinhard Selten "for their pioneering analysis of equilibria in the theory of non-cooperative games". 

His remarkable and actually very painful life story was perfectly depicted by his autobiographer and journalist Sylvia Nasar in her two books; "A Beautiful Mind" (on which the subsequent motion picture was based) and  "The Essential John Nash", which she co-edited with Nash's friend from college Harold Kuhn (also a renowned mathematician). As Chris Giles from the FT said in his praise of the latter: "If you want to see a sugary Hollywood depiction of John Nash's life, go to the cinema. Afterwards, if you are curious about his insights, pick up a new book that explains his work and reprints his most famous papers. It is just as amazing as his personal story." The book contains a facsimile of his original PhD thesis, along with eight of his most important papers (from game theory and mathematics) reprinted. 

After the Nobel Prize success things got better for Nash. By 1995 he recovered completely from his "dream-like delusional hypotheses", stating that he was "thinking rationally again in the style that is characteristic of scientists." Refusing medical treatment since his last hospital intake, he claimed to have beaten his delusions by gradually, intellectually rejecting their influence over him. He rejected the politically-oriented thinking as "a hopeless waste of intellectual effort". In 2001 he remarried his wife Alicia and started teaching again at Princeton, where he continued his work in advanced game theory and has moved to the fields of cosmology and gravitation

The Phantom of Fine Hall, as they used to call him in Princeton due to his mystique and the fact that he used to leave obscure math equations on blackboards in the middle of the night, will never cease to raise interest, praise and awe. Nash was another perfect example of a thin line between a genius and a madman. Luckily, in the end, his genius prevailed. 

So what is the Nash equilibrium? 

The reason why this concept was so revolutionary was because it significantly widened the scope of game theory at the time. In the beginning, following the von Neuman and Morgenstern setting, game theory was focused mostly on competitive games (when the players' interests are strictly opposed one to another). These types of games were known as zero-sum games, limiting to a significant extent the scope of game theory. Nash changed that by introducing his solution concept so that any strategic interaction between two or more individuals can be modelled using game theory, where the most unique solution concept is the Nash equilibrium. Games are not zero-sum, they aren't pure cooperation nor pure competition. They are a mixture of both. 

The idea of the Nash equilibrium resonates from the simple assumption of rationality in economics. The term rationality in economics is not the same as common sense rationality we all think about upon hearing this term. It refers to the idea that each individual will act to achieve his or her own objective (maximize their utility), with respect to the information the person has at his/her disposal. The concept of rationality in economics is therefore idiosyncratic - it depends on whatever a particular individual deems rational for themselves at a given point of time. It rests upon the idea that a person will never apply an action that hurts him/her in any way (lowers his/her utility). 

The Nash equilibrium is the most general application of this idea. A non-cooperative game, according to Nash, is "a configuration of strategies, such that no player acting on his own can change his strategy to achieve a better outcome for himself". In other words, if there exists another strategy that can make an at least one individual better off, then the outcome does not satisfy the condition for a Nash equilibrium. 

Let's look at an example. The most simplified example of how a Nash equilibrium solution concept works is the Prisoner's Dilemma game. Consider two robbers arrested for a crime. They are both being interrogated by the police in separate rooms. They are presented with two options (strategies): keep quiet (silent) or betray the other guy (betray). If they both remain silent, they both only get a light sentence of a year in prison for obstructing justice. If one betrays the other and the other guy keeps silent, the betrayer is released with zero imprisonment, and the other guy gets pinned for the whole crime and gets nine years in prison. If they both betray each other, they both get six years in prison. What's the optimal thing to do?

Applying the Nash equilibrium concept we need to find a strategy that is the best response of one player to whatever the other player may decide. When no players have any incentive to deviate from a set of strategies (strategies are always a pair in two-person games) we can say that this set of strategies is a Nash equilibrium. 

Consider the game depicted in the table below:

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It would seem that the best strategy they can apply is for both to keep silent. If they do, they both get only a light sentence. However this strategy set (-1,-1) is not a Nash equilibrium since at least one person has an incentive to deviate. In fact, they both do. If Prisoner 1 decides to defect and betray Prisoner 2, he gets 0 years in prison, while Prisoner 2 gets 9 years (third cell, with payoffs 0,-9). Prisoner 2 applies the exact same reasoning (second cell with payoffs -9,0). In the end since the better strategy is always to betray, they both play the same strategy (betray, betray) and end up with payoffs (-6,-6) which is the Nash equilibrium of this game. From this point no player can deviate and make himself better off. If Prisoner 1 decides to go for silent he risks getting 9 years in prison instead of 6. There is no way for them to reach a cooperative equilibrium in this simplified scenario.

Naturally, cooperative games do exist and they help us understand how game theory solves for example the free rider and the collective action problem. It was Elinor Ostrom (1990) who applied these concepts to reach her optimal solutions in solving the common pool resource problem in small groups with persistent interactions. Robert Axelrod (1984) is another, finding that even though the defection strategy is more rational, sometimes various other factors will result in a cooperative outcome between the players. The Nash equilibrium helped initiate a huge amount of research on these and many other problems within and outside the academia. The reason game theory is usually considered as the most applicable economic theory - in that it can be used to solve real-life problems - is purely thanks to John Nash. 

Rest in peace. 

Most notable papers: 

"Equilibrium Points in N-person Games". Proceedings of the National Academy of Sciences 36 (36): 48–9. (1950)

"The Bargaining Problem". Econometrica (18): 155–62. (1950)

"Non-Cooperative Games". Annals of Mathematics 54 (54): 286–95. (1951)

"Real Algebraic Manifolds". Annals of Mathematics (56): 405–21. (1952)

"Two-Person Cooperative Games". Econometrica (21): 128–40. (1953)

"The Imbedding Problem for Riemannian Manifolds". Annals of Mathematics (63): (1956).

"Continuity of Solutions of Parabolic and Elliptic Equations". American Journal of Mathematics 80 (4): 931-954. (1958)

Do we need the FCA?

Students of the Financial Conduct Authority will appreciate the FCA’s Business Plan 2015/16 which mostly sets out what it does, but also touches on what it achieves and its value for UK citizens.  It is as close to accountability as the FCA gets.

What does the FCA do?

The core business is the supervision “of about 73,000 financial services firms operating in the UK, and we prudentially supervise those that are not covered by the Prudential Regulation Authority (PRA). We look closely at firms’ business models and culture and use our judgement to assess whether they are sound and robust.” (p.63)   Understanding each of 73,000 firms better than the manager of that firm is a Herculean task even with 3,060 staff and a budget of £460M. But that is only part of the FCA’s business.

Annex 2 lists 106 new EU regulatory initiatives in which the FCA is involving itself.  It would be good to believe they were seeking to reduce the number, and simplify and reduce the burden, of the on the British financial sector and its consumers.  There is no hint that such is the case.  The FCA seeks “active engagement” which can be translated as assisting more rather than less.

In addition, the FCA has a programme of domestic regulation. Yet the FCA should not now be creating new financial regulations at all.  Under the Brown administration’s agreement with the EU, Brussels is responsible for all new financial regulation leaving the UK solely with supervision.  For the FCA to add new rules is not merely piling Pelion upon Ossa, it is undermining the City’s competitiveness and unnecessary.  In a single market, a regulation is either needed everywhere or nowhere.  

In June 2014, the Chancellor created a Fair and Effective Markets Review (FEMR) of financial services, co-chaired by the Bank of England, FCA and HM Treasury. The report is due next month but has been widely trailed. Before we see that review (due July), and in an effort to keep itself busy, the FCA has announced a further review (due spring 2016) covering some of the same ground, the Investment and Corporate Banking Market Study (ICBMS): “We are examining issues around choice of banks and advisers for clients, transparency of the services provided by banks, and bundling and cross-subsidisation of services.” 

In addition Annex 1 lists 30 “current and planned market studies and thematic work” not all of which will lead to new regulation.  Perhaps the most significant is the “Culture review”.  There is no mention of whose culture, nor how and why it should be reviewed.  Reassuringly the start and finish dates have yet to be decided.

So far as one can see from the business plan, the FCA has no central guiding principle to determine what it should do.  The Financial Ombudsman Service deals with consumer complaints and the Competition and Markets Authority deals with policing fair markets and competition.  By contrast, the FCA seems to involve itself without restraint in anything it feels like doing.  It is no surprise that its costs are growing at 6% p.a.

Measuring performance against the statutory objectives

The Chairman, in his foreword to the plan, highlights the FCA’s “principal tool [for measuring success], our outcomes-based performance framework” (p.7). As searching that description did not reveal such a framework, he presumably is referring to the table below. 

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It is unusual, to say the least, to have a set of performance measures without a single number.  And there is no discussion about whether these objectives, for that is all they are, can be attributed to the FCA or not. Most of them are what the firms do but it is impossible to know whether the firms’ performance improved, or quite possibly deteriorated, as a result of the FCA intervention. It may be hard for the firm to keep the consumer at the centre of its attention if the FCA is knocking on the door.

The paperwork I now have to complete for my stockbroker has multiplied two or three times as a result of “compliance” which I also have to spend £20 a time for.  In all other respects, the service is exemplary, but this has tipped my stockbroker experience from satisfaction to complaint.

The “respected regulatory system” will let only the good firms know where they stand, leaving the miscreants, presumably, in the dark. Is low financial crime an indication of the FCA doing well or failing to detect crimes or, just possibly, the police deterring crime and catching criminals?

The Business Plan refers the reader to their quarterly data bulletin for the actual figures but, guess what?, these have little to do with the table above.  They are:

  • Monthly number of people contacting FCA about consumer credit.

  • Outcomes of upheld complaints.

  • Annual volume of “approved persons”.  There are about 20,000 p.a. and, in the last two years, not a single application has been rejected.

  • Attestations “are a supervisory tool used to ensure clear accountability and a focus from senior management on putting things right in regulated firms.” Basically they are individual senior executives promising to put things right. There were 74 of those in the year to March 2015.

  • Skilled person reports. There are 50-60 cases a year of consultants being called in to investigate matters more closely.  The great majority are conducted by accounting firms at a cost of over £150M p.a. The quarterly data simply give the number, not the cost nor whether they are value for money, still less whether the FCA adds any value.

  • The number of financial promotions. The relevance of this item to FCA performance measurement is opaque.

The simple bottom line of this section is that there is no performance measurement of the FCA.  It is an elaborate charade.

Value for Money?

In his Foreword, the Chairman also stated “We are also committed to working as efficiently as possible with firms to deliver value for money, as well as the right outcomes for consumers and the financial markets.” (p.7). This topic next arises, in any substantive way, on p.37: “We remain focused on the principles of good regulation and advancing our objectives in the most efficient and effective way. We will continue to measure and evaluate our impact and report publically [sic] on this. Our aim will be to be as effective as possible and focus our resources on the front line of regulation. In 2015 we will launch an Efficiency and Effectiveness Review, which will look at the value for money of areas of higher expenditure. As part of this we will review our governance and decision-making processes. To embed this we will have a new structure,”

This good intention is repeated a number of time in the pages following, e.g. “We will achieve this by delivering year-on-year improvements in effectiveness, efficiency and economy. One of the key drivers of our strategy is to increase our efficiency and effectiveness.” (p.72).   

Nowhere does the plan indicate how the FCA’s effectiveness, efficiency and value for money should be measured, still less what the numbers are or should be.  The nearest we get is the p.37 quote above. As some army wag wrote on a Berlin wall in the 1940s: “we tend to meet any new situation by reorganising; and a wonderful method it can be for creating the illusion of progress while producing confusion, inefficiency and demoralisation.”

There is no evidence of the FCA providing value for money or even understanding how that might be measured.

Conclusion

All the things the FCA does could be done as well, if not better, by other agencies:

  • Consumer complaints have vastly increased since the FCA and Ombudsman services were created.  In the year to Match 2015 the FCA had 150,000 consumer contacts (almost all complaints) and the Ombudsman contacts have risen from 62,170 in 2003 to 512,167 in 2014. One has to wonder about cause and effect. There are undoubtedly too many cases coming to the FCA and Ombudsman Service but the answer to that is not to increase these quangos, and allow malpractice to grow, but to take systemic action to minimise malpractice and when it does not arise, pressure the firms to deal with the complaints themselves, e.g. by massively increasing the penalties on complaints upheld by these two quangos, including gaol sentences.

  • Consumer complaints do, and should, go to the Financial Ombudsman Service which has 2,400 staff of its own.  The FCA deals with only about 25% and is not now needed.

  • As noted above, the FCA should not now be creating new financial regulations at all.  It should be helping the EU deregulate, simplify and reduce the burden of financial regulation, not assisting the EU in undermining the City’s competitiveness.  In a single market, a regulation is either needed everywhere or nowhere.  

  • Much of the wholesale side of the FCA’s supervision is purely “prudential” because it overlaps with supervision by the Bank of England through the Prudential Regulatory Authority.  The BoE should be left to get on with it.

  • About one third of the cost of the FCA relates to the investigatory work contracted out to professionals, largely accounting firms.  It should not take more than a couple of people to choose the firms, the terms of reference and make out the cheques.  This, and all remaining FCA functions, could be handled by the Competition and Markets Authority.  Indeed that would be a better solution anyway to bring consistency to markets and competition policy.

It is hard to resist the conclusion that the FCA is not simply redundant but a drain on the effectiveness, resources and efficiency of the vital financial services sector.  It should be abolished.

When a fossil fuel subsidy is not a subsidy

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You may have seen an IMF report in the news last week claiming that fossil fuels are subsidised to the tune of over five trillion dollars every year. This made good headlines, but only because the IMF chose to describe untaxed externalities as 'post-tax subsidies'. This is unusual and misleading. I wrote about why in The Daily Telegraph:

The IMF’s idea of “subsidies” to fossil fuels refers to something completely different. They have taken the indirect costs to society of using energy – air pollution, traffic congestion, climate change – and, if governments haven’t imposed special taxes on one, called it a “subsidy”. The problem is, we already have a word for these things: externalities. And there is something rather Orwellian about describing a failure to tax something as a subsidy. Here’s an example of what we’re talking about: when my neighbours play loud music at night, it makes me worse off. I’d pay, maybe, £20 for them to shut up, if it wasn’t so awkward to go to the flat downstairs, knock on their door and start negotiating prices. Economists would say that they are imposing a £20 externality on me, and that in a perfectly efficient world, my building would charge residents around that much to play music, and give it to sleep-deprived neighbours like me. But, in the absence of that charge, nobody would say that those neighbours are being subsidised by me. It’s just not what the word means. Except, apparently, to the IMF.

That isn't to say that externalities should never be taxed, if a private solution can't be found. But we already have high fuel taxes in most of the developed world, and in the developing world these taxes will hold back growth. Since economic development has positive externalities, it's not obvious that the negative externalities of fossil fuels outweigh the positives. You can read the whole piece here. 

Spotting Worstall's Fallacy in the wild

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In a discussion of Joe Stiglitz's new book in The Observer we see this:

Back in 2008 the top 20% of households in the country were estimated to be worth 92 times more than the bottom 20%. The latest estimate puts the gap at more than 100 times. And a further £12bn of welfare cuts are planned by the new Conservative government. The gap between rich and poor is unquestionably widening.

That conclusion may or may not be right but it's most certainly not supported by the evidence which is given of the contention. That evidence coming from this ONS report:

Total net wealth is defined as the sum of four components: property wealth (net), physical wealth, financial wealth (net) and private pension wealth . It does not include business assets owned by household members, for instance if they run a business; nor does it include rights to state pensions, which people accrue during their working lives and draw on in retirement.

It's known as Worstall's Fallacy simply because our own Tim Worstall bangs on about it so often. We cannot measure inequality (or poverty, any number of other things) without taking into account the things we do to reduce said inequality (or poverty, or any other problem). It's only when we look at the post-attempt to solve the problem situation that we can turn our minds to whether we should be doing more, or possibly less, to try to solve this problem.

So, note that our definition of wealth there does not include that state pension: something we do to reduce the wealth and income disparities between those who can save for a private pension and those that cannot. Note that it includes private housing equity but not the capital value of a below market rate tenancy for life ("social housing"). It does not include the capital value of health care, or education, free at the point of use, for all the citizenry. It does not include whatever capital value we might ascribe to the social insurance policies that will provide us with an income in the case of economic misfortune.

We do all of these things because they make people wealthier. Perhaps not as wealthy as other arrangements might make them, but the essential driving point is that we consider health care, education, social insurance and so on make people wealthier. Thus, in our discussion of wealth we must include them. We cannot look solely at the market distribution of purely market wealth and even attempt to decide whether more or less should be done to try to change that distribution. We must look at the post- all the redistribution we already do situation to be able to make a decision.

To switch from wealth to income to make this point. The TUC has done the calculation about income inequality. Between the top 10% and bottom 10% the market inequality is about 30:1. Maybe that's too high, maybe that's not high enough, your moral choice. When we take account of taxation and benefits that falls, and when we take account of government provided services, that health care and eduation and so on, it falls again. To 6:1. Again, you can say that this consumption inequality is still too much, or not enough, your moral choice. But 6:1 is very definitely different from 30:1.

And what is the relevant ratio to be looking at if we want to make a decision upon whether to do more redistribution or less? Quite, it's obviously that 6:1 one, not the 30:1. And so it is with wealth or poverty or so many other problems. The number we need for our decision is the extent of the problem on the ground, not the extent of the problem before all of the things that we already do.

Assigning reasonable capital values to the effects of both the welfare state and government provided services brings the 10/90 wealth ratio down to anywhere between 20:1 and 5:1. We could and would defend anywhere in that range dependent upon assumptions. Is that too much? Not enough? Entirely up to your moral choices. But it's very different from that 100:1, isn't it, and it's also the relevant number we need to use when thinking about what to do next.

A glorious example of political naivety

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There's any number of lessons that we might take from the past few years. Fragile banking systems aren't a good idea perhaps. We seem to have shown that monetary policy is still effective at the zero lower bound, therefore fiscal policy isn't the only thing we can turn to in recession. The eurozone is giving a useful empirical lesson in optimal currency areas. There's all sorts of things we can and should learn from recent times. But then it's also possibly to be hoplessly naive about all of this:

The biggest surprise for me, and perhaps it shouldn't have been, is the degree to which politicians are willing to put political interests ahead of helping people in need. Watching the political/policy reaction to the Great Recession was both disappointing and eye opening.

Well, no, it shouldn't have been. Ourselves we waver between thinking that public choice theory is the right way to think of this (politicans and bureaucrats are subject to the same incentives of self-interest as everyone else) and the pronouncements of Mancur Olson (all governments are bandits exploiting the population and about the best we can hope for is a stationary bandit, not a roving one) dependent upon the crust of our liver on any particular day. But either insists that we cannot look to the political class as being interested in either what we want or what we need: not unless it's going to directly impact upon our propensity to vote for them so that they get to stay part of that political class.

The idea that a professional economist should believe that politicians would ever put helping people in need above political interests strikes us as simply hopelessy naive. However, this is still a good outcome: the next politician promising that we're going to run the world off kisses and unicorn parps is less likely to be believed now, eh?