The Pin Factory Blog

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.

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.

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?

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.

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.

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.
 

One of the more important things that is happening in the world economy at present is that India is finally getting to grips with rent seeking in that economy. They have decided that foreign supermarkets may enter the market in a big way for the first time. This is, predictably, causing consternation among the small shopkeepers who rightly suspect that they will be put out of business:

A strike has been called by the opposition Bharatiya Janata Party, as well as communist parties, which will see schools, public transport and many independent businesses shut down for the day. Thousands of kirana, owners of small independent supermarkets, also plan to close their shops to protest against the government's decision to allow foreign stores to enter the market. Many large international chains already have shops in the country, but are only allowed to sell to smaller shopkeepers, not directly to consumers. The ruling Congress party's controversial plan would allow them to compete for market share with existing retailers in an attempt to attract further foreign investment and boost the economy.

It may or may not boost the economy: but it will certainly boost the efficiency of the economy. For two reasons.

The first is that, as we've noted before, some 50% of all food grown in countries like India is wasted. It rots somewhere between harvest and the plate or is contaminated by pests, that sort of thing. Having an efficient logistics chain will thus reduce the amount of food being wasted. Something rather important in a country like India that has so much malnutrition. And yes, at least one recent report on how to feed the world has indeed said that exactly what places like India need is that very efficient logistics chain. That chain which the supermarkets provide.

The second though is a little more complex. Those small independents, plus many of the stallholders below them in the retail hierarchy, are going to get put out of business by the more effcicient supermarkets. This is of course a problem for them and their jobs. But from the viewpoint of the economy and the consumer such jobs are a cost, not a benefit. If it is possible to distribute food with 5 million instead of 10 million people then that is an advance: as a whole the economy would then get the food distributed plus whatever the production is of those 5 million displaced labourers.

Such transitions are not easy on those displaced and I am not cackling with glee at their likely suffering. Yet why are they protesting? Because they know that the previous ban on the competition provided them with rents in that Indian economy. The sweeping away of the prohibitions is going to detroy their ability to demand those rents from the consumers. Do not forget, by the way, that if the consumers actually prefer the small supermarkets then the large ones will go bust as they will get no custom. So what is really being asked of the Indian people as a whole is, well, what do you prefer? Lower prices and efficiency or that lovely social feeling of the locally owned and much smaller retail outlet?

This may only be happening in one country. But India's population is indeed large, well over one billion people. That one seventh of the entire species will soon be gaining access to cleaner and fresher and cheaper food is indeed an important world event, no?

The change is one toward more liberty as well: all to the good. Now, if only we could get our own rulers to put quite so much political effort into abolishing rent seeking.....

Isn't it just absolutely marvellous that we've got all those bright people and all that vast amount of lolly tied up in speculation in futures on agricultural commodities?

The mass slaughter of millions of farm animals across the world is expected to push food prices to their highest ever levels.

Well, not quite.

Nicholas Higgins, a Rabobank commodities analyst and author of the report, said: "There will be an initial glut in meat availability as people slaughter their animals to reduce their feed bills. But by next year herds will be so reduced that there won't be enough animals to meet expected demand and prices will soar."

That's it: the price of meat is likely to rise next year: after the fall caused by people slaughtering the animals they won't be able to feed next year. And this is why we're so lucky we've got all those people selflessly providing price signals to us.

This year's harvest looks like being pretty miserable. At least for nothern hemisphere corn and wheat they do. As a result of this those speculators, doing good in their gilded towers, have bid up the price of corn and wheat for delivery later this year and next. There will be less of it around they think. This is what is known as a "price signal". Those people who might feed cheap corn to a bacon buttie on the hoof, cheap wheat to the vital ingredient of a future Big Mac, won't feed them the expensive stuff. So, less bacon (sob, sob) and less Mickey D's (honestly, who cares?) and as a by product there's more corn and wheat around to feed to people. Because we're using less of our now limited supply to feed animals.

All of this is achieved by (mostly) men playing around in offices with money. Not that they intend these results of course: they're driven purely by the greed, the lust, for filthy lucre. Yet as a result fewer people will starve than would in their absence.

And to think that there are people out there who would stop speculation in food. Presumably they're too stupid to see what we get from the system. The alternative, that they would prefer people die for ideological reasons, is just too 20th century to consider these days.

James Croft, author of our superb report on profit-making free schools, is now head honcho of the Centre for Market Reform of Education, and has today released a paper that raises serious questions about the government's plans to replace GCSEs. The recommendations are refreshingly innovative, harnessing the innovative properties of the market to try to solve some of the problems that the government's plans are aimed at addressing:

Michael Gove is one of those reforming politicians who galvanises support by polarising opinion. In the media frenzy surrounding the announcement of the government’s reforms to Key Stage 4 (KS4) qualifications yesterday, it is unsurprising that there wasn’t much place for intelligent comment offering qualified support to his proposals. While recognising the concerns that the Minister seeks to address, there are good reasons why even those who share his concerns about the utility of GCSEs, and what should be done with the curriculum to address them, should feel some unease about his proposals. Fortunately, there is a market-based solution that fits squarely within the Coalition parameters, which would be feasible if the Conservatives were to be more conservative and the Liberal Democrats more liberal. […]

You can read the rest of this blog post on The Centre for Market Reform of Education website.

When Qualifications Fail: Reforming 14-19 Assessment, the Centre’s first discussion paper, by James Croft and Anton Howes, is published today.