Poor Greece, the fat lady ain't singing yet

As with the opera not being over until the Fat Lady has sung about her youth, beauty and slenderness the Greek debt saga is not going to end until the one important decision is taken - how much debt should Greece repay? We've been making this point for a number of years now in a number of venues. There is just this one question that must be answered:

Policymakers were still in disagreement this weekend over assumptions about Greece’s long-term growth trajectory, and the ability of the country to maintain a sizeable primary surplus over the medium term.

Countries such as Germany believe stronger growth in Greece will remove the need for debt relief, with the country’s expansion alone enough to reduce its debt burden to sustainable levels.

However, the International Monetary Fund has called for more conservative estimates of growth and primary surpluses, insisting that it will not join Greece’s €86bn (£74bn)  third bail-out package unless there was meaningful debt relief.

A simple truth about our universe is that debts which cannot be repaid will not be repaid. Thus putting rather a large weight upon the definition of "cannot." Which is where the disagreement is here.

The IMF thinks that Greece can run a primary budget surplus (the primary meaning before interest and debt repayment, the implication being this is the amount that can be used to pay down debt) of 1.5% of GDP for some decades. Run that forward and that means Greece can repay some portion but not all of the current debt. 

Everyone else is a politician and a politician quite aware of the fact that they've lent their voters' funds to Greece. And they'd just hate for said electorate to find out that they've lost that money by so lending it. So they've cut the interest rate to near nothing (a few basis points over the ECB's current QE influenced very low rates on much of it) and extended repayment out towards the end of the century. Losing money through opportunity cost, inflation and interest not paid is less politically painful than cutting the capital sum. Even the dimmest voter on the Chemnitz Omnibus would cotton on to the loss if there was a reduction in the outstanding sum.

But this still leaves them coming up short - unless Greece runs a primary surplus of 3.5% of GDP. So, that's the demand. Not what can Greece achieve, but what must Greece achieve to save political positions? 

Which is where the problem is. No democratic system can run a primary surplus of that size over time. It can be done for a year or two but sending that much of the economy off to foreigners just isn't going to happen over the long term. The only person we know of who did manage it was Ceausescu in Romania and they machine gunned him and his wife in the end.

The IMF is correct here but then this is Europe, political desires do so often seem to win out over economic reality. But that's why the whole thing is still rumbling on after all of these years. And it will continue to do so too. Until that basic truth is recognised by all, debts that cannot be repaid will not.

But what's actually wrong with Facebook and data?

There's obviously something we've missed in this argument about Facebook and the other internet giants and their collection and manipulation of our data. The specific fine handed out this past week we're just fine with. Facebook was more than a little economical with the actualite to the regulators over its capabilities and intentions. Whether there should be such regulators we think doubtful but if there are going to be then they should indeed be told the truth. It's like the courts and perjury and contempt - these are very serious crimes on the grounds that if we're going to have courts then people must take them seriously and also tell them the truth.

So with regulators, this is a rule of law matter. However, he larger issue here is something we've missed:

Equipping competition law for the formidable task of properly tackling data-rich behemoths is a fertile area of research and policy, but still awaits enforcement. Challenges include market definition, accurately valuing data assets and dealing with the particular modes of virtual competition.

If the value of data were more appropriately considered, the commission might not have waved through the Facebook/WhatsApp merger so easily.

We're not even understanding the concern here. The data, to the individual, isn't worth a great deal. That's why they're willing to hand it over in order to share cat pictures. The individual pieces of data are worth nothing. It's only the information, in aggregate, and when processed, that has any value. And that's what Facebook really is, an aggregator and processor of such information. That's the function of the beast, so why people are worrying about something doing what it says on the tin we're really just not sure.

We assume this is just the usual about people doing something new and damn it, they're Americans, so we had better stop them. 

If we are really to change the dynamics of the modern data economy, it is going to take more than just targeted arrows and small-fry fines.

Again, we're missing this. Was there a meeting at some point, one we weren't invited to, which decided that the dynamic must be changed? If so, what was the justification? That they're Americans or something useful?

Although we think we do understand this bit:

For the future to offer anything more than resignation to the power of Facebook and its ilk requires dedicated finance for sustainable, civic-oriented technology, strategies to incentivise growth and for people to vote with their feet. How many lies will it take until we hit that point with Facebook?

Yes, we get this bit:

Dr Julia Powles researches technology law and policy at Cornell Tech and at the University of Cambridge

Give my department a big grant please.

Other than that, what actually is the problem that is being complained about?

Questions to which the answer is no

Unemployment is of course a problem, there's those vague whispers of technological unemployment coming down the pike, so, what should we be doing about it?

Should the Government Guarantee Everyone a Job?

No. That's one of those questions where it's entirely and quite clear that the answer is no.

As to why it's no it's because it's a solution that's at least a century, if not near a millennia, out of date as an answer to the problem.

One way of detailing the problem is OK, so government guarantees a job for everyone. Which job?

Back when work was, to a large extent, the application of human muscle power to either farm work or some form of building (roads, canals, buildings, sea defences, whatever) then labour was homogeneous. Someone who could guide a plough might not be quite capable of surveying a dyke, for example, but they'd be perfectly, reasonably at least, efficient at doing the spade work to build one. Thus the various make work schemes in times of dearth familiar to the varied Chinese and Indian administrations of the past were sensible reactions to dearth.

The 1930s experience in the US, well, still, building a dam did need tens of thousands equipped with little more than a shovel and wheelbarrow.

But today we just don't have homgeneous labour. It's hugely, highly, heterogeneous. This is, of course, just the side effect of that much greater division and specialisation of labour which makes the modern world so rich. But it does mean that there isn't anything that we do which either requires or benefits from the mobilisation of large amounts of untrained, in this task, labour.

Well, perhaps government could work out what needs to be done, then train people to do it and that's how we'll provide everyone with a job? But that runs straight into Hayek, pointing out that the market is the only method we've actually got of processing through the information to work out what needs to be done and in what manner. We know very well that government trying to decide that is going to be less efficient than just leaving well alone.

And as a final kick in the fork for the argument that we can just move labour from one task to another at will. If we could do that then there would be no such thing as technological unemployment, for labour could be moved from one task to another at will.

Cats in a sack comes to mind, like cats in a sack

Or if you prefer your analogies more Northern-style, too may ferrets in that trouser leg:

The EU’s chief Brexit negotiator, Michel Barnier, fears the refusal of member states to soften their demands over the size of Britain’s “divorce bill” could lead to a collapse in talks and the UK crashing out of the EU without a deal, minutes of a meeting of the European commission reveal.

Barnier has told the commission president, Jean-Claude Juncker, and other senior officials that the stakes are so high because Berlin and Paris are refusing to pay more to cover the UK’s departure, while those governments who receive the most from EU funds are opposed to any cuts in spending.

And thus those demands for €60 billion, €100 billion, that are being bandied about. Not because there is any legal right to have such sums, nor even a nod to the lads agreement that they would be paid, but because that's the amount that wouldn't inconvenience the others as we leave.

Which isn't, if we're honest about it, that great a justification for our having to open up the chequebook. And it's not as if the EU doesn't have form here, they're prone to backcasting.

The very centre of the Greek debt problem is that the IMF insists that Greece can only manage a primary surplus of 1.5% of GDP, thus can only pay back less debt than is owed. The Eurogroup has been working the other way around, in order to pay back the total that surplus should be 3.5% over decades. Therefore Greece must be plunged into the sort of austerity that no democratic polity has ever managed over the long term just because that's what makes the EU sums add up.

It's the same here. We desire this much money, that's the demand. Not anything to do with how much is owed, due, or can or will be paid.

And we would note one more interesting little point. If it's €100 billion to leave then what would have been the even greater costs of staying? For this demand really does only take us up to 2020......

The demands become ever more extreme, of course they do

No organisation ever goes quietly into that long dark night and most certainly no bureaucracy. So, even if the original problem is solved we end up with ever more demands. For little reason other than the prolongation of the life of the organisation making them.

So it is with food waste:

Less than 1% of edible surplus food produced by UK manufacturers and farms is being sent to charities to help feed the hungry, according to new figures.

Vegetables that are perfectly edible are being left to rot in the fields, and other foods not sold to retailers are put into anaerobic digestion or sent straight to landfill, the UK’s largest redistribution charity FareShare has warned.

While retailers and supermarkets have doubled the amount of surplus food sent to feed the needy in the last three years, a high volume of food that never makes it into the shops is being needlessly wasted elsewhere in the supply chain, it said.

We're entirely in favour of the change that has happened over the last decade or more. The growth of food banks fills us with nothing but joy. The little platoons have discovered a technology, for that's what such a system is, a technology, with which they and we can fill in one of the gaps of the State's incompetence. Why wouldn't we be happy about this? 

Similarly, people getting realistic about best by dates and the rest is just fine with us. But it's possible to take this much too far, as is being done here:

According to the government’s waste advisory body Wrap, food waste at a supermarket level – any edible food that remains unsold – stands at just 2%, whereas 17% of edible food surplus found in manufacturers and on farms is lost.

When dealing with something perishable like food we'd take 2% to be perfection. Even before considering things like the marginal cost of clearing up the last little bit as opposed to the marginal value of doing so. But now to the extreme:

Vegetables that are perfectly edible are being left to rot in the fields,

So why is this happening? Because they are not worth the cost of collecting them, that's why. Let alone the cost of then transporting them and distributing them. If they were worth it then people would be doing so, profit is a pretty good incentive.

So what is now being demanded is that someone must make a loss in collecting those vegetables from the fields and transporting them. And you know what? We think that insisting that someone else makes a loss is extreme, we really do.

Come and do your gap year at the ASI—and get paid!

Backpacking around South-East Asia is great, but do you know what's more fun? 

That's right, spending 6-9 months in the ASI office with all of your favourite neoliberals!

It's that time of year again: the ASI is looking for two new employees, to start in September 2017.

As last year, the crucial requirements are that you:

• Are on a gap year; you must be 18-20
• Are open-minded, inquisitive, friendly, intellectually curious, eager to learn and interested in policy
• Know and have an opinion on the ASI's perspective and what it does
• Have a broadly liberal perspective on the world

Does that sound like you? If it does, you've passed the first hurdle. Congratulations! You're one step closer to potentially becoming the latest ASI intern. 

Your duties will include:

• Organising lunches and dinners, keeping the database up-to-date & doing secretarial work for the directors
• Managing the blog
• Reviewing and editing ASI publications
• Selling ASI merchandise
• Logging RSVPs for events
• Meeting a wide range of interesting & important people
• Learning about social & political science
• Socialising with the staff
• Carrying out self-directed research
• Writing blog posts
• Setting up and cleaning up after events
• Mailing out publications to subscribers
• And, of course, having fun! 

Previous interns have gone on to work with the Adam Smith Institute, including the ASI’s current Executive Director, Sam Bowman, and Head of Digital Policy, Charlotte Bowyer, who was a Gap Year intern in 2009-10.

The role pays the National Minimum Wage. All applicants will interview with President Madsen Pirie and Deputy Director Sam Bowman at the Adam Smith Institute offices in Westminster during the summer.

Please send a CV and cover letter of around 500 words to gapyear@adamsmith.org by Sat 1st July 2017.

Excess diesel NOX emissions cause 0.07% of deaths globally

So we're told in this latest paper at least, the NOx emissions from diesel engines, over and above what emissions standards say they should be spewing out, cause 0.07% of deaths globally:

Diesel driven cars, lorries and buses churn out far more air pollution than standard testing procedures suggest, leading to many thousands of unreported deaths, scientists claim.

The excess emissions of harmful nitrogen oxide (NOx) exhaust gases can be linked to 38,000 premature deaths worldwide, according to the new research.

Mr. Google, our friend, tells us that there are some 54 million deaths a year globally. Thus that 0.07%.

At which point we've got to ask the obvious economic question - compared to what?

The heart of the problem here is that we have three things we'd like to have. Low diesel consumption for cost and CO2 reasons, low NOx creation for those health reasons and low cost engines just on the general basis that cheap is better than expensive. And as with the engineering wish list, faster, better, cheaper, we can only have two of the three.

As we crank up the combustion temperature in order to gain fuel and CO2 efficiency we end up creating more NOx. We can only avoid this by having expensive, not cheap, diesel engines - or adding the expensive urea systems to such vehicles. This is not an optional aspect of our universe. We cannot have all three, we can only have two of the three in pretty much any combination we desire. Low NOx is possible cheaply at the cost of general fuel efficiency, we can have low NOx and efficiency at high cost and so on.

So our 38,000 deaths are compared to what? To the extra cost of having no cheap diesel engines, only expensive ones.

No, we don't know the answer here either. But we do insist that this is the correct question to be asking. We've limited, scarce, economic resources. So, what is it that we'll have to give up to gain this purported reduction in deaths from NOx? For without that answer we cannot possibly hope to answer the question of whether we should do it or not.

How did France's Robin Hood Tax work out?

Back in 2011 and 2012 I wrote quite a bit about the financial transaction tax (FTT) that was being proposed by the EU, and which is now being proposed by Labour. We have a FTT on shares in Britain in the form of stamp duty, but now Labour want to impose it on other financial assets too.

An FTT is a tax, usually a fraction of a percent, on trades of financial assets. It’s sometimes referred to as a Tobin Tax and is intended by its advocates to reduce high-frequency trading which, they claim, adds random noise to market prices and increases volatility. 

In this sense the tax may be efficiency-raising in that it shifts costs these traders impose on others onto those traders themselves. However, if high-frequency trading is not mostly based on randomness, as Sam Dumitriu argues here, then curbing it will slow down the incorporation of new information to market prices, increasing market volatility and making markets less efficient.

FTTs are also sometimes referred to as ‘Robin Hood Taxes’ by people who think they will raise lots of money. Some of these people look at the total volume of a market and presume that taking 0.5% of that will not reduce the volume of trading very much. This is somewhat at odds with the other case for the tax – if it changes behaviour it won’t raise much money, if it raises much money it won’t reduce the supposed negative externalities that high-frequency trading creates.

The EU still has not implemented a Eurozone-wide one. France, however, did introduce a 0.2% tax on purchases of shares in any publicly traded company with a market cap above €1bn (£789m), on “naked” short sales of sovereign credit default swaps, and on some high-frequency trading. It included several provisions that made it less restrictive than a true FTT, including a rebate scheme for trades of the most liquid shares and for intraday trading. Still, we can look at this to see what the impact of stamp duty on shares might be in Britain, and what extending this to other assets might be.

At the time I pointed to the empirical evidence and warned that France’s tax could reduce market liquidity and raise volatility, and not raise very much money either. Sweden introduced a financial transaction tax in the 1980s which ended up raising one-fortieth of what its backers had promised, drove many exchanges to London, and was abandoned after less than ten years. I reckoned that France would see many similar results.

Five years on, what have been the consequences of France’s transaction tax? A recent European Central Bank paper looked at the impacts on French equity markets, and for the most part it concludes that the outcomes of the tax were quite bad.

Market liquidity fell a lot, by 20% for affected stocks. Revenues were much lower than anticipated – an estimated €475m instead of the €1.6bn that had been predicted – “which once again points at an underestimation of the impact on revenue-generating market activity”. 

Importantly, volatility rose and price efficiency fell, even though the tax exempted intraday trading (allowing “short-term arbitrageurs to continue eliminating price inefficiencies quickly”). Though the overall effect was small (but statistically significant), the rebate scheme masked a large effect on volatility in shares that were exempt.

The paper’s authors conclude that the French FTT had an overall negative impact on market quality, where reducing market liquidity led to less efficient pricing of assets and more volatile price movements, and effectively priced high-frequency trading out of existence altogether in affected shares. “The decrease in volume associated with the FTT hurt liquidity and crowded out “useful” trades.” 

In order words, as I said in 2012:

“High-frequency trading allows markets to be highly sensitive to new information and to intermediate between buyers and sellers who may not be in the market at the same time. Stopping high-frequency trading would have the effect of making price shifts more sudden, unpredictable and large.” 

More volatile markets are riskier ones, so the cost of investing is higher and you get less of it. We don’t want that. All of this should make us treat a British FTT with extreme caution, and indeed make us consider abolishing stamp duty on shares instead of extending it to other parts of the market.

PS: I can’t resist pointing out my other prediction, about a man whose approval ratings eventually fell to 4% and whose party now seems to be on its deathbed: “Along with policies like the 75 per cent upper tax rate Hollande proposed during the election, the French may soon regret electing their blundering new President.”

The great bidding war

Many general elections turn into bidding wars, and this election is certainly no exception.  Instead of proposing measures to grow the economy to the benefit of most sections of society, some parties vie to see how much money they can take away from a smaller group in order to hand some of it out to buy the votes of a larger group.

They promise largesse and nominate tax increases that they say will pay for it all.  Unfortunately, they never seem to have heard of a dynamic, as opposed to a static, economy, and seem unaware that taxation changes behavior.  So far we have seen proposed increases in Corporation tax and income tax hikes for high earners.  These have been variously promised to fund untold billions of extra spending on education, health, social care, public sector pay, and a raft of other things besides.

Critics have pointed out that the sums do not add up, but it is worse than that.  The proposed increases in Corporate tax and high earner income tax will almost certainly both lose revenue.  The steady reduction in Corporation tax, down from 28 percent to 19 percent, has seen huge increases in the revenue it generates, while the reduction in top rate income tax has not only increased revenue, but greatly increased the proportion of total income tax paid by high earners.  The top 1 percent of earners now contribute 27.5 percent of all income tax paid, while nearly half of the population pay no income tax at all.

Corporation tax falls on shareholders to some extent, and on labour to a much larger extent.  Higher tax rates lower investment and activity, and in some cases lead to relocations beyond the reach of the tax man.  Higher taxes on income reduce incentives and expansion, and encourage people to move away, while discouraging others from moving in. 

Increases in both of these lead to falls in revenue, so far from promising who will receive the imagined gains, those proposing the increases should be telling us how they intend to finance them.

Another example of something we've long maintained to be true

In rather too much of what it tries to do government is counterproductive. Examples abound, raising the minimum wage to aid the incomes of the poor leads to some having no incomes at all. Germany's vast push away from fossil fuels has led to a rise in the country's consumption of coal, cracking down upon illegal drugs just raises the profit margins for those who continue to deal them.

There is a subset of this, which is that government often designs plans to encourage some activity. Those plans being either so absurdly complicated, or come with such side effects, that they diminish, not increase, the desired amount of whatever it is. And so it is with forestry in England: 

The figures mean that a Government pledge that 12 per cent level of woodland cover should be reached by 2060 is looking increasingly remote.

What joy, there is a plan. That plan includes paying subsidies to those who plant trees:

Landowners who wish to plant a forest must negotiate a "complex and bureaucratic" system in order to obtain a Government grant, the report said. 

Three agencies, the Forestry Commission, Natural England and the Rural Payments Agency administer the main grant available, the Countryside Stewardship Scheme. 

...

Witnesses told the committee that the application process was “tortuous”,“bureaucratic”,“ overly complex” and “not fit for purpose”.

Quite how a simple grant to stick acorns in the ground can become bureaucratically tortuous we're not sure. It doesn't need the usual panoply of diversity advisers, health and safety checks, inequality impact statements and all the rest, does it? They're not out there demanding disability access and racial balance are they? 

Our own experience of business tells us that people shouldn't apply for government grants for anything. Precisely because to do so is to get sucked into a morass of bureaucracy making the money on offer not worth the effort. It's nice to have another example to add to the portfolio but there's got to be a better way of getting things done than this, no?

Perhaps even that those who would like a few trees around for their children get on with the acorns in holes thing and the rest of us agree that it's their land and nowt to do with us? Nor our money?