The Pin Factory Blog

There are, to a useful level of accuracy, two forms of capital controls. The first is the type we're seeing in Cyprus today, limited and supposedly shot term controls in order to stave off imminent disaster. Even the OECD and the IMF tend to say that these are OK in the right circumstances. The second sort of capital controls comes from the grottier end of the  fascist economic spectrum. Capital, in some manner, belongs to the country not the individual so it's just fine for the country to deny the individual the right to send it where they wish.

The problem with this distinction is that the former tend to end up transforming into the latter:

The authorities said at the time the controls would be temporary and limited in scope – lasting a few weeks or, at worst, a month or two. Half a decade later, the capital controls are still in place and getting more and more restrictive. This was the second time Iceland had implemented `temporary’ capital controls.

The first time it did so, in the 1930s, led to the controls being in place until 1993. This is in line with the historical evidence; once capital controls are imposed, they are really hard to abolish, and a temporary arrangement usually ends up being permanent.

The reason is that when a country implements capital controls, it signals the authorities have lost control over the economy, needing to employ desperate measures. That is does not exactly build confidence, so anybody with money will seek to abandon the sinking ship as quickly as they can, persisting in that desire until things look better. While the controls last, however, it is unlikely that things will look better because the abolition of the controls can become a necessary condition for improving economic conditions. This is why the official pronunciations on the duration and the scope of the capital controls in Iceland were always too optimistic.

If you look around the UK at present you will see the usual suspects quite slavering over the new consensus that the short term controls are OK. For exactly this reason: they know that short will become long. It even popped up in the Green New Deal from NEF and other economic ignorants. The idea was that if British capital could be stopped from leaving Britain then there would be more capital to invest in their lunatic plans. This doesn't really work for:

The Icelandic capital controls have proven to be highly damaging for its economy; investment has collapsed and is just about the lowest in Europe at 14.4% of GDP in 2013, compared to the EU average of 18%. The reason is that foreign direct investment almost completely dried up...

It most definitely wouldn't work in the British situation. You may have noticed that we're running a trade deficit. We have been since, ooh, the early 80s I think? What often gets missed is that if you're running a trade deficit then you are, by definition, running a capital account surplus. That is, more foreigners have been investing in Britain than Britons have been investing in foreign. This is simply an identity, it's not an arguable point.

So, institute capital controls in order to increase the amount of capital available for investment and.....suddenly Britain has less capital as Johnny Foreigner no longer sends his capital here for people to enjoy.

We really don't want to let them reimpose capital controls you know. It's not just the vileness that accompanied them, the having to ask permission before taking more than £25 out of the country and all that. It's that capital contols would be hugely damaging to the economy of the country. Because, just for those who are in the Green New Deal and thus too stupid to notice, we import capital in Britain. And if we have capital controls then we cannot do that, can we?

As you all well know we tend to like trade around here. For it was indeed Adam Smith who pointed out that it was the division and specialisation of labour followed by the resultant trade in production that made everyone richer. That said trade is currently leading to the greatest reduction in poverty in the history of our species is also true as globalisation roars on.

However, an intriguing little piece of research shows that trade also increases female education.

The intensification of international exchange throughout Europe came with a progress of mercantile science and practices, which forced merchants to acquire considerable skills in arithmetic, bookkeeping, reading, and writing. In merchant communities women played a special role, since they were often in charge of business operations, especially during their men’s year-lasting travels: therefore, women needed to be literate. Accordingly they received more (and better) education, both formally and informally, as documented by a vast historical literature on abacus schools open to girls and on female epistolary writing. The fact that commerce, contrary to other occupations, did not require physical strength reinforced this pattern.

What the authors are doing is tracking how Italian areas which were plugged into the trading routes and system in medieval times had, and continued to have, greater education rates (and for longer) than those which were not. The effects lasted centuries too.

What interests me here though is not quite just being able to say that trade leads to the desirable outcome of greater female education. There's a rather deeper point. It's a standard mantra of development economics these days that female education is one of the vital things that leads to development. Certainly, those places which educate more girls (and have a smaller gender gap in education) do perform better on all of the usual measures of human advancement. But the thing is I'm not quite sure that this mantra is correct. I think it might be putting the cart before the horse.

I don't doubt that greater female education can lead to greater growth mind. I'm just positing that it's the growth that leads to the greater female education. For two reasons.

1) The aim of this life is to have grandchildren. That's true whether you think biblically or in a Darwinian manner. When there are very high child mortality rates then many children are required to ensure grandchildren. Thus in a poor society much of a woman's life will be spent in pregnancy and child rearing.

2) A poor society is, almost by definition, one that works on human muscle power. It is inevitable that men in general have more of this than women.

If we put the two together we can see (OK, posit) that a richer society will have lower child mortality and also will be less reliant upon human muscle. Thus the incentive to educate girls will rise. They will not need to be wombs on legs in order to ensure grandchildren and also the value of their (educated or not) labour will rise relative to that of men as other forms of energy enter the society.

This is nothing at all to do with whether we should have gender equality in anything at all. Of course we should, 'uman beans are 'uman beans and we've all the same rights. Rather, this is about how to trigger this desirable outcome. And I have a very strong suspicion indeed that the greater education and rights of women come as a result of the beginnings of economic growth, not produce it. Yes, I'm sure there's a feedback going on as well. But the logical policy outcome of this would be that we concentrate less on "gender issues" in development and more on development itself as the gender stuff will largely solve itself given the incentives that development produces. Women's labour becomes more valuable as development proceeds leading to greater education of that potentially more valuable labour.

Hurrah and trebles all round of course. But get the development going first.

Easter in Britain is one of the busiest shopping days of the year, with garden centres and DIY stores in particular full of people stimulated by the spring weather – well, when we are not having an Arctic spell – to bring a bit of a new look into their homes and gardens.

But larger stores, like those same garden centres and DIY stores, will be able to open only six hours on Easter Sunday – like every Sunday. Convenience stores can stay open longer, but retail premises larger than 280 square metres are allowed only six hours.

That alone should make us question the Sunday trading hours. It is a completely arbitrary number: why not 250 or 300 or 350 square metres? Laws should apply to everyone, or to nobody.

Since limited Sunday trading was introduced, Sunday has become an important shopping day. It gives families in particular a little more time at the weekend for those large purchases that they want to make together. It used to be hard to do that and get in the weekend food shopping at the same time. It has actually made things more relaxed.

Remember too that other important shopping days often fall on a Sunday – Christmas Eve and Boxing Day, for example. Retailers right now could really use the boost of a proper day's trading at these times, especially those who are  losing trade to online alternatives.

The Sunday trading laws were relaxed for the Olympics and the world did not come to an end. Subject to reasonable planning restrictions to prevent local nuisance, we should relax them entirely. Why should the government decide whether people can and cannot shop, or can and cannot open for business?

The law states that employees can refuse to work on a Sunday without fear of retribution. That should really apply to other days too – not everyone has Sunday as their religious day of rest. And of course, nobody has to shop, or open their shop, on Sunday if they do not want to. Why should those who do not want to be able to force the rest of us to comply with their choices?

I'm always rather puzzled by those who shout that we've got to bring manufacturing back to the UK. Apparently this will solve all our problems over what to do with dim Northern lads or something. Once they're all hammering out whippet flanges then we just won't have a problem with unemployment ever again. The problem with this idea is that modern manufacturing simply doesn't provide many jobs. And if it were to provide mass employment it would be very badly paid employment too:

Americans working to produce traded goods and services earn, roughly, according to their productivity. If low-skill workers in America aren't much more productive in manufacture of traded goods and services than low-skill workers in China, then they can't earn much more than workers in China while being employed in manufacture of traded goods and services. They can earn a rich-world wage in production of non-traded goods and services, like sandwiches and haircuts, so long as there is sufficient local demand. In other words, the only way to get less-skilled Americans a good wage in a manufacturing industry is to significantly raise their skill and productivity level. If that can't be accomplished, they can only hope to find good wages in non-traded industries. At least, that is, until wages of less-skilled workers across the developing world come much closer to converging with those in America.

Of course, that's all about America but the same logic pertains here as well. Chinese manufacturing wages are around $6,000 a year at present. Meaning that if we had mass employment in manufacturing, as they do, then wages would need to be around that level. Or, alternatively, UK based manufacturing would have to be much more productive to support higher wages. And "more productive" is the same as saying "uses less labour". Thus you can have few well paid jobs (in the Rolls Royces etc of this world) or you can have many badly paid jobs (Shenzen). It isn't actually possible to mix and match between the two.

It's also worth noting that UK manufacturing output peaked in 2005. Oh sure, manufacturing employment has been falling for decades as has manufacturing as a percentage of the economy. The first because manufacturing has become more productive, the second because other parts of the economy grew faster. But manufacturing output did indeed rise from the 1940s all the way through to 2005 (with wobbles for recessions of course).

It's also worth noting that manufacturing has been falling as a percentage of the global economy. No, really, it has, and manufacturing employment has been falling globally too. Even as manufacturing output continues to rise. And the UK's share of the economy that is manufacturing is around and about the norm for an OECD country too. What's happened to our manufacturing sector is nothing special at all. It's happening everywhere, to everyone.

What's actually happening in manufacturing is what happened to farming 80 years ago. It mechanised, as manufacturing is now. The sector is simply using ever less labour as it uses ever more machines to keep on pumping out things we can drop on our feet. Then it was tractors, now it's robots but the effect is much the same. We're going to end up with, as we did with farming, 2 % or so of the population doing the manufacturing. Everyone else is going to be one or another form of services. Perhaps whippet flanges are essential, perhaps Britain should make its own but whatever we do about it we're simply not going to see mass employment in manufacturing ever again.

Which is why it always confuses me to hear the incessant claims that we must have more manufacturing. Why?

A continual theme of mine is the way that the various numbers we're presented with in the political arena aren't entirely, exactly and strictly, quite true. Nothing new in this of course, the lies, damned lies and statistics line is well over a century old already. The latest, how shall we put this kindly, misdirection is on the subject of energy prices. Ed Davey tells us that we're all saving money by spending vast amounts of money on renewables.

Our analysis shows that, taken together, these policies and others mean household bills are already lower – by an average of £64 – than they would have been if we’d introduced none of our policies.

This is exceedingly difficult to believe. For energy produced by renewable means is still more expensive than that produced by fossil fuels. This is why we actually have a climate change problem: if renewables were in fact cheaper then we'd all quite naturally be using them. And it's not really possible to make the system cheaper as a whole by moving from a cheaper component of it to a more expensive one.

An excellent thrashing of this contention is provided here, at The Register:

Thus we see that the consumer price of 'leccy overall stands approximately 25 per cent higher today than it would have been if Whitehall and Brussels had left the UK energy market alone.

Mr. Davey then goes on to tell us that government action will really save us all money in hte medium term, you just wait and see:

In 2020, bills will on average be around 11 per cent lower, than they would be if we were doing nothing. Let’s be clear - bills will still be higher. But they will be £166 lower than if we sat on our hands.

The problem here is that they've made an assumption: that natural gas prices will rise by 70% in the next few years. The only reason they've made this assumption is because they've not bothered to talk to anyone at all who knows what they are talking about as the FT makes clear:

The UK’s Department of Energy and Climate Change is about to publish forecasts suggesting that gas prices could rise by up to 70 per cent over the next five years. This is scaremongering nonsense, and shows just how out of touch the Department is with the realities of the international energy market. Officials appear not to have consulted the industry or the traders. In reality the odds are that prices are just as likely to fall as to rise for three distinct reasons.

Those three reasons are shale (even if we don't produce much ourselves, there's still going to be US exports), demand has fallen because of all the renewables that everyone is being forced to use and the pricing structure of the material is about to fall over. Traditionally gas prices were linked to oil prices and it's increasingly becoming true that they are not: gas prices are linked to gas prices now.

Regular readers will know that I'm generally onboard with the idea of climate change, think it's happening, we're doing it and that something must be done about it. However, this doesn't mean that we all have to wander off into LaLa Land in our discussions of what to do about it.

I agree that a certain amount of smoke and mirrors is inevitable in politics: but what worries me is that DECC has been repeating this guff to itself so often that they actually believe it.

They really are not saving us all money on our energy bills by making energy more expensive. And it would be very nice indeed if they stopped misleading us about their doing so.

The Bank of England’s Financial Policy Committee has announced an increase in capital ratio requirements for banks and the FSA announces a reduction.  The former is, of course, for existing banks and the latter for new banks.  Higher capital ratios are intended to stop banks going bust so, on the surface, it is odd that those that are unlikely to be at risk now their days of profligacy are over, at least for the time being, are having further bolts applied to the empty stable door whereas those banks most at risk, namely the small new ones, are being encouraged to expose themselves further.

Maybe handicapping the big banks in this way is good, in the long run, for competition. Perhaps we should not care if small banks go under and worry only about the systemic banks.  That shows a misunderstanding of the economic cycle.  Cyprus was the last domino in the 2008 crash, not the beginning of a new one.  Whatever happens in Cyprus will not put large British banks at risk.

Some economists, and the Bank of England, fail to grasp an elementary piece of accountancy.  Capital adequacy ratios decline if cash is replaced by loans to small businesses. New small banks are going to have an insignificant effect, in the short term, on lending to small business and we need those loans to rebuild the UK economy.  It is the clampdown on lending by the big banks which is mostly to blame for the UK’s sluggish economic recovery.

The Chancellor nearly got it right when he arranged for big banks to borrow at subsidised rates.  He hoped they would pass it on with more lending at lower rates.  Instead they put the money in their pockets, widening their margins and bolstering their capital ratios.  Instead of sending them to gaol for defrauding the rest of us, the Bank of England is now patting them on the back.

People who make a lot of money are not very popular in Britain these days.  A cult of envy fed by the Left and parts of the media led by the BBC decries "the rich," "the top one percent," and wants us to take it that the wealth of the few is gained at the expense of the many.  If we lived in a world where wealth was in fixed supply this might be plausible, but we don't.  We live in a world where wealth is created, and in which entrepreneurs who develop new products and new processes bring improvements to our lives and are rewarded accordingly.  Even so, people who become rich risk the envy and resentment of those who do not understand how the process works.

Onto this stage has stepped someone who is probably the best ambassador that entrepreneurship has had these past few years.  He's Nick D’Aloisio, who's just made a reputed £20m by selling his app to Yahoo!  He's 17 years old.  The smartphone app, called Summly, was developed in his bedroom while he was revising for GCSEs, and basically manages to summarize longer news stories into three paragraphs that can be read on a smartphone's screen.  Sarah Rainey's interview with him in the Telegraph depicts a fairly normal teenager, excited but not overwhelmed by his success.  When asked what he intended to do with his new-found wealth, he replied that he was going to buy a new shoulder bag since his present one has a broken strap. 

Part of his success is down to backers like Hong Kong's Li Ka-shing who backed him with investment and treated him fairly in the process.  Now Nick plans to become an "angel investor" himself, lending financial support and skills to other start-ups.  As a successful young entrepreneur, he is a good role model for other teenagers.  Looking at his achievements they can aspire to do similar things themselves.  It does make rather a refreshing change from ambitions limited to perhaps celebrity status following a fleeting appearance on reality TV.

Had this been done by a 45 year-old, no doubt envy would have been aroused, and mean-spirited pieces would have been written about how unmerited it all was.  But Nick is 17 and seems fairly well-balanced, so most people are applauding his success.  Basically Britain needs more entrepreneurs, and we need a culture that can produce them and reward them. Nick D’Aloisio makes an excellent ambassador for that culture.

At the end of last year, the Conservative MP Alec Shelbrooke suggested to parliament that 'Welfare Cash Cards' should be introduced to curb benefit spending. Janice Atkinson has recently suggested that UKIP adopt the policy, and a worrying number on the right seem to agree with the idea. There are two quite major problems with this policy, first, it will not deliver the intended consequences and will result in higher costs to the taxpayer, and second, it is paternalistic and ethically wrong.

I agree that government should seek to reduce costs to the taxpayer, but it is unnecessary and cruel to punish people on benefits purely for being out of work. If they are not trying to find work (and breaking their “jobseeker's agreement”), then sure, sanction them. But to punish all on benefits, purely for being such, will not help anyone. As long as people on Jobseeker's Allowance (JSA) are trying to find work, they should be supported by the government, not punished purely for trying. This is especially true in times like these, when unemployment is often involuntary and there can be hundreds of applications for every job.

Petty moralising over this problem will not deliver positive outcomes. Just like the US Food Stamps program, 'Welfare Cash Cards' will be plagued with corruption and other problems from the start, requiring police resources to deal with. Anyone addicted to drugs (including alcohol and tobacco) will find ways around the system. They might start dealing drugs, join a gang, they might resort to theft or other crimes to pay for their habit. Something that will happen will be the growth of a new industry that turns 'Welfare Cash Cards' into ready cash, taking a tidy sum in the process, diverting taxpayers money away from the intended recipients (who will be poorer as a result) straight to criminal gangs.

Government will not be good at closing loopholes or fixing other problems with the system. Are local corner shops going to be registered? That's tens of thousands of little shops. What about people who get jobs through networking in pubs? What products are allowed to be purchased exactly? Are we going to have a government register of acceptable products? Did anyone proposing this think through these problems? Of course not; small-minded moralising was more important.

This idea, like many that usually come from the left, is nothing but government meddling. It is attacking the results of various problems rather than dealing with the sources. We should instead look to legalise drugs, end high alcohol and tobacco taxes, tighten up the benefits system and tackle supply-side issues to create jobs and reduce the cost of living. Whatever the issue, misguided and petty moralising is not the answer.

There's a lot to like about the Reason Foundation's new report, "The Argument for Equal Marriage". Its basic argument is:

1. Marriage has changed enormously over time.
2. Same-sex marriage is just another change, and on the scale of possible changes that can be made to "marriage", it is far less significant than changes that have already been made to the status of women.
3. "Traditional" marriage as defined by the monotheistic traditions has treated both women and gay people badly, and it is therefore not wise to use it as a basis for law or public policy.

As the report says,

"Marriage has been put through the laundromat of the Enlightenment, two waves of feminism, and the civil rights movement: what we have now would be unrecognizable to Bracton or Blackstone or Jesus, and this is a good thing. If one were to isolate the greatest change in the definition of marriage over time, it would come down to a choice between the enactment of unilateral divorce (with its attendant effect on murder, suicide, and domestic violence rates) and the ending of coverture, granting women property rights in marriage and separate legal personality. Compared to these definitional shifts, equal marriage is peanuts."

Read the whole report. Last month I wrote for The Guardian that marriage, gay or straight, should be taken out of the hands of the state.

Worryingly many commentators repeatedly make two basic budget blunders. Firstly, ‘deficit’ and ‘debt’ are not the same. Secondly, this government is not cutting spending. Neither point is original. Both should be simple to understand. Given consistent misinformation these both need clarification.

Debt is an obligation owed by one party (the British Government, i.e. the taxpayer) to a second party, the creditor (owners of British government bonds). The national debt is the total amount our government owes. It is different from the budget balance. That is the gap between what the government spends and what it receives. The budget is in deficit when the government spends more than it receives.

So what are the numbers? According to latest estimates from the Office for Budget Responsibility, public sector net debt for 2012-13 is projected at £1189 billion. By 2017-18 this is expected to reach £1637 billion. So when David Cameron said earlier this year, “…this government has had to make some difficult decisions, we are making progress. We are paying down Britain’s debts”, he was wrong. No. We haven’t paid down debt and will owe more.

It is the deficit that is projected to fall. For 2012-13 the deficit is forecast at £120.9 billion. However, the coalition no longer expects to meet pledges to balance the budget. Even by 2017-18, government will spend more than it takes in (with an estimated £43 billion deficit). High deficits will remain and the Government will add to the amount we owe every year.

Surely we've been cutting spending? No, again. The OBR neglect to mention how much the government spends for most of their report. Yet on page 123, they note spending is rising. For 2012-13 they forecast government spending of £673.3 billion, increasing to £765.1 billion by 2017-18. So in absolute terms expenditure is rising, not falling. Even accounting for inflation (using their inflation projections) expenditure rises significantly. The Coalition have only reduced the amount by which government planned to grow expenditure. Nevertheless, this brings pain, from pay freezes to programme closures, because budgets assumed even more profligate spending. Now that expenditure is growing more slowly than previously planned, some old commitments have lost out to new sources of expenditure.

Debt is rising, expenditure continues to outstrip receipts, and the Government is increasing not shrinking spending.

James was a founder of the Liberty League, who are hosting the upcoming Freedom Forum.