Tuesday, 13 December 2011

Opportunity Costs of the Iraq War

Some of you have seen or heard my musings on this issue before. This Quora answer seems to have gotten some traction, so I reproduced it here:

What could America have bought and built for itself with the trillions of dollars spent in Iraq and Afghanistan over the last decade?
Nobel laureate economist Joseph Stiglitz places our war costs over $5T. A NY Times infographic (http://www.nytimes.com/interacti...) puts the tally at $3.3T. Leaving aside the politics of whether our money has been wasted, what could it have bought, had it been spent at home?

$3.3 trillion is a lot of $$.

For example it is equivalent to:

$60,000 for the poorest 50% of Households. (about 57,000,000 households)

End the Eurozone crisis by paying off Greece, Italy, Spain, Portugal and Ireland's national debt. (Together, their national debt's are just over $3 tril)

Endow over 100 new Harvard Universities (Harvard's endowment is $32 bil)

Guarantee Unemployment below 5% for the next 6 years, offering $40,000 a year to volunteer for charity. (13million unemployed, 9% of country)

About 150 Manhattan Projects (each costing about $24billion)

Monday, 12 December 2011

Tax Justice

I've been asked to contribute an essay on Tax Justice to the Tax Justice network's newsletter.

Here are my first thoughts on tax justice:

1. What is the point of taxes?
2. Under what conditions will takes fulfil that point?
3. Do those conditions hold?
4. How can we change things so that they do hold?

Firstly it seems to me that the point of taxes is two fold:

1. To raise revenue, for public goods provision, and social welfare projects.
2. To deter unwelcome behaviour, and reward welcome behaviour.
3. To act as a damper on the economy in boom times, and hence to act expansionarily in bad ones.

1. taxes effectively promote public goods and social welfare when it is generally progressive and fiscal expenditures are subject to proper democratic control.
2. taxes act as good behavioural influences if they tax negative externalities and effectively subsidise positive externalities.
3. They act as an 'automatic stabiliser' if they are progressive.

Which of these conditions hold?
Well, my guess is taxes are very slightly progressive, thanks to income tax. But I need to look into this. It goes without saying VAT is very regressive, and I suspect taxes on Cigarettes, Alcohol etc are so too. What does the incidence of corporation tax tell us? Surprisingly, the evidence seems to be that corporation tax is regressive (evidence to follow in the article)- really enormous companies hardly seem to pay any of it and high corporation tax rates seem to be associated with lower growth numbers. This tax is very popular though, so we need to think carefully about how we use it. Fiscal expenditures are sometimes extraordinarily well controlled, whilst at other times almost no one seems to agree with them (find me a room of 20 people where 3 or more people support the CAP, and I will show you a farmers guild). Finally, taxes hit negative externalities when the special interests that produce those externalities aren't too powerful. Conversely, they promote positive externalities when the special interest who want those positive externalities are very powerful. Sometimes this works right (the Tobacco lobby has long been losing power), more generally it doesn't (a Carbon Tax in America is long overdue). In America, kids get taught how to code from a much younger age than anyone here in the UK is (most kids don't touch code -the language of the 21st Century- until you hit undergraduate, and even then, only if your doing a science subject). Why is America so far ahead of this game? ... Silicon Valley, anyone? Finally I've already dealt with the progressive issue. Since unemployment benefits are very progressive, this means tat overall fiscal policy does act as a good automatic stabiliser. It makes sense I think to look at taxes and spending together, since obviously they are related, but we have to be careful before saying tax revenue belongs to those who paid it - on the contrary, it belongs to society at large.

When it comes to getting things to work properly, we need to make sure taxation is:

1. Progressive
2. Simple
3. Non-distortionary
4. Well Targeted.

Sometimes good taxes will be regressive (Cigarettes, or Carbon Taxes for example). That means we have to be willing to use spending to offset those effects. But generally, thanks to income tax we can have a progressive tax code. A simple tax code, is good for everyone. Right now, companies are almost forced to dodge taxes- the pressures of shareholder value maximisation and the ineluctable logic of the market means you can't let your competitors get one up on you. If they're finding clever accounting tricks to avoid taxes, you sure as hell need to too. In the end, society loses. A simple code would make dodging impossible for those really keen to do it, and less necessary for those who feel compelled to. It might even reduce some of the deadweight losses associated with collecting taxes.

How do you make taxes non distortionary? A million and one views to pick through here. One that needs to be debunked is the argument that taxing millionaires is a job killer, as these people work less and produce fewer jobs. Wrong - low taxes on high income people tends, in general, to increase rent seeking, rather than production (again, evidence to follow in article). We hear a lot about the substitution effect, but hardly anyone mentions the extremely important income effect. Since income taxes are not perfectly marginal, changes in the tax rate will have both an income and substitution effect. For the richest members of society, the substitution effect will be negative on work, but the income effect will be positive. Which effect dominates? Well, probably neither - as we see, what we get instead is reduced rent seeking at higher tax rates. Broadly speaking, we want taxes to be consistent - why should corporate income be taxed so differently to personal income for example (corporate income is taxed only as 'profit', whilst household investment in things such as education, nutrition etc is totally overlooked). Why are mortgage repayments tax deductible? On the issue of well targeted, its really a case of building powerful coalitions in favour of good taxes, and this is primarily a political, not an economic, problem. These things need to be looked at very, very carefully.

I'll be thinking about these issues over the next few days. Let me know your thoughts @ ravin.thambapillai@gmail.com,

Thursday, 24 November 2011

Euro-Trillions. (Doomsday is coming)

Eurozone Public debt is heading towards Reinhart and Rogoff's magical (and somewhat mysterious) 90% of GDP, over $11 trillion which is, in short, a lot of cash. (I don't have specific numbers to be honest, but the numbers were based on estimates taken from here and here and partially also here it's worthing calling to attention how massively wrong the IMF's statistic's were, understating Eurozone debt by about 10-15% of GDP!).

Unsurprisingly (cough, as I predicted), the Commission has used this as an opportunity to promote integration.

Equally unsurprisingly, at least one National Government is cautious about ceding sovereignty to 'more Europe'. Perhaps a bit more surprising (but not really, given the context), the main national government opposing the move is Germany.

Nouriel Roubini, yet again finds himself the man of the hour after not just predicting in 2006 the (then) impending subprime mortgage crisis but also for warning, way ahead of the curve, of the serious risk of sovereign debt default in the Eurozone. Today, he has an interesting take on Europe's battalions of woes.

He makes the very important point that even if the ECB did take the leap of faith and start acting as a lender of last resort, that there's a good chance that someone in Germany is going to sue the ECB in the German Constitutional Court. Since the German Constitutional Court has a history of being jealous of the ECJ, the chances are pretty good that they would then win that case. Some ECB members could then face prosecution (urgh I saw this in a video a few days ago and can't find it now - readers, if any of you saw it, could you link it in the comments section on the blog?)!

Roubini's take is now that the most likely option is widespread debt-restructuring and a probable partial Euro-zone breakup. Other than 'nein' to all attempts at salvaging the Eurozone, its not clear what Merkel's response to Germany's failed bond auction will actually be.

The crisis is deepening day by day. Although French public debt looks not catastrophic on the face of things, the possibility of private debt being socialised in the event of peripheral defaults leading to bank insolvency is a serious threat (which, by the way, is what happened in Ireland which otherwise had been a very fiscally responsible country). French exposure to Italian debt is obscene. The data is a bit hard to pick through but from what I can make out, France is exposed to about half of Italy's externally owed sovereign debt according to the Bank of International Settlements.

At the same time, peripheral debt is either going to be taken on by Germany, the ECB, or Defaulted on. Right now, Merkel is effectively, forcefully insisting that it will be defaulted on. If it comes about, that will lead to massive payouts on Eurozone sovereign debt Credit Default Swaps and sovereign debt Derivatives (which Warren Buffet called in 2003, financial weapons of mass destruction- which could (and probably would) trigger a second financial crisis in the Eurozone, resembling the one that hit America after CDS's and CDO's on Sub-prime mortgages collapsed.

That scenario is sufficiently doomsday-esque that Merkel might, just might, be forced to pull back from it. But even if she does, there's no guarantee that ECB 'full fire power' intervention would actually save the situation. Since Euro-bonds are a more long term ambition anyway, there's no reason to think they are likely to make much impact in the short term.

The point of this post, other than to illustrate just how catastrophic the emerging and ever more likely doomsday scenario is, is to point out that one way of reading Germany's options is as a 'relative vs absolute' gains problem, common in the international relations literature.

Relative Gains become important when countries are more concerned about what happens to them relative to everyone else, as opposed to how well they do per se. For example, if Germany chooses a Doomsday scenario, even though salvaging the Eurzone would be better for everyone just because the costs of salvaging the Eurozone fall largely on Germany (note, Doomsday costs Germany even more, but it costs everyone equally) then it is making a relative gains decision.

An absolute gain decision would be if a country benefits from a decision, but not by as much as everyone else. Here, Germany would gain from saving the EU, but peripheral nations would likely gain even more. IF Germany went along with this, it would be making an absolute gains decision.

Realists in International Relations Theory tend to think countries, even the ones in the European Union, make decisions based on Relative Gains. Liberals think they make decisions based on Absolute Gains (at least on Economic Issues). This seems to me to be a possible test of that outcome.

Right now, things look good for the Realists.

Saturday, 19 November 2011

Guest Blog - Occupy Can Make the World Better

I heard someone say recently: “I’m not na├»ve enough to think that camping outside St Paul’s cathedral is going to bring down capitalism”. Call them the sceptic.

The sceptic is saying: “Protesting is extremely unlikely to bring down capitalism. Even if bringing down capitalism is a worthy goal, why bother protesting?”

The obvious reply to the sceptic is: all movements for social change start out small. But they grow and grow, until success looks inevitable. So scepticism is premature. As Schopenhauer said, “All truth passes through three stages. First, it is ridiculed. Second, it is violently opposed. Third, it is accepted as being self-evident.”

Both the sceptic and the dreamer accept this assumption: if the movement directly brings down capitalism, then it has succeeded. Otherwise it has failed.
But that assumption is wrong. There are other reasons to protest.


Everyone likes democracy.

The definitive element of democracy is the feedback loop from the citizens to the leaders. The citizens tell the leaders what they want. The leaders are supposed to do things that the citizens want. If the leaders don’t do this, the citizens can make them leave. Because leaders don’t want to leave, the policies adopted tend to be ones that the citizens mostly agree with.
In the UK, the way this works is through elections. But elections are a crude way of achieving this feedback loop.
The quantity of feedback is pretty terrible too: turnout is low, and we vote roughly once every four years. Information-wise, it’s a choice on a menu. Worse, there are only two real alternatives: so the information coming to the government is just a set of binary yes/no answers.

The quality of feedback is poor, too. Elections focus on the wrong issues. If elections are the only reason for people to think about politics, then they end up not being very well informed on the majority of issues. Moreover, they don’t get to decide what we are talking about.

There’s a lot of evidence for this, and it’s easily found, so I will confine myself to one example. Americans want, by a 2-1 margin or higher, depending on which poll you look at, universal healthcare. When was the last time you saw universal healthcare seriously discussed in a Republican debate, or a Democratic debate, or an election debate? Instead they’re talking about putting tariffs on China, which will help nobody and hurt lots of people.
Leaders end up talking about unimportant things, acting however they want, and selling this to the citizens – which is not how it’s supposed to work. And citizens end up feeling either apathetic or angry.
After the great recession happened, a lot of apathetic people became angry.


‘Protest’ is the wrong word. It implies people shouting, ‘I don’t like this.’
Occupy is an organization, discussing how to improve the way things work. It’s a part of ‘civil society’. Democratic theorists like ‘civil society’, because:
It increases the quantity of feedback going to the leaders, both directly, by expressing citizens’ views, and indirectly, by encouraging people to talk more about politics, about the economy, the environment, and all the other things that elites would rather the people didn’t pay that much attention to.
It also increases the quality of feedback: by discussing politics, and thinking about politics, people learn. And because the issues being talked about are important, the value of discussing these things is higher. Moreover, the organization itself is way more democratic than the government in charge of us, and the quality of views expressed is much better than the media would like us to believe.

If you’re a democrat, and someone tells you that we can improve the quality and quantity of feedback to the leaders, you would have to welcome that. Your attitude to the protests would be: “Excellent. Let’s listen to them, and let’s talk.”
Most people’s response was far more negative than that. So most people must be anti-democratic, even if they don’t realize it.
What if they don’t end up bringing down capitalism? Who cares? That’s the wrong goal.
They’re making democracy work better.

Social change
Our picture of revolutions, and social change, is of lots of people marching through the streets and a defeated government eventually giving in and changing a law, or stepping down and being replaced by a set of heroes.
That picture is wrong. Revolutions can be much more gradual. You might not be able to point to a specific time when they happened.

For example, it used to be OK to call gay people ‘fairies’ and all sorts of ugly names. Casual racism was a standard part of the landscape in 70s Britain, as was blatant, overt sexism.

Now that’s unthinkable: people are growing up who are almost race-blind, i.e. the distinction between a brown person and a white person is ceasing to matter to people, just like the distinction between a ‘noble’ and a ‘base’ origin person has completely moved out of our minds now. A generation ago, that was unthinkable. Similarly, whether someone’s gay or straight is seen as unimportant. But there wasn’t a revolution. Nothing huge happened; change was gradual.

But that doesn’t mean that it was inevitable: it happened because people did something about it. Slowly, they changed the way we talk and the way we think. And the result is that whether someone is gay or straight or brown or white is becoming as unimportant to our view of them as, say, what flavor of ice cream they prefer. It just doesn’t matter as much as it used to.
Even if the Occupy movement doesn’t succeed in bringing down capitalism, they could accomplish something different – and better, by changing the way we talk and think, and by changing what we are talking about. If they continue, they could change the way we see things – which means changing the world.

Why ask them to stop?

Today's Blog entry is a guest post from Nabeel Qureshi, Casberd Scholar of Politics and Economics at St John's College, Oxford University and contested President of the Mensch Committee.

Thursday, 17 November 2011

SOPA - Protecting the Internet

The internet is a truly amazing place. Despite concerns, which are probably true, that it has cost jobs in the western world, the internet has been a place for free expression (sometimes shockingly so), discussion, organization and so much more.

The real magic of the internet is its freedom. But that freedom, at least in the United States, is now seriously under threat. A bill that received a Congressional Hearing yesterday wants to, effectively, put an end to all that. The idea is supposed to be to protect intellectual property violations, which are, admittedly, widespread on the internet. But the law seeks to give the government the ability to effectively ban or blacklist websites on which users post violating links, videos or any other material. If the law had been in place, YouTube, Wikipedia and many other websites which we rely on today (quite probably including facebook and certainly including Google) would never have taken off.

Its absolutely critical to the future of free expression - and arguably therefore for humanity itself - that this bill does not go through.

This video provides a useful vantage point:

PROTECT IP Act Breaks The Internet from Fight for the Future on Vimeo.

For those keen to contribute ideas to the Occupy Movement

This is the link to contribute ideas to the occupy movement, as well as expressing your own views on how good currently submitted ideas are.

Occupy London Manifesto Voting

And this is the summary

Occupy A Private Prison: Shut Down Stewart Detention Center

Really sad state of affairs.

Links & E-petitions

Strictly off topic post, but may interest some readers:

Links to a few good reads:
Curious happenings at twitter
Martin Wolf vs Bob Diamond
Google takes another swipe at Apple (it all comes down to NFC, really)
Paul Krugman is wrong - and in an interesting way! (he says so himself)
Really interesting 1% datasets
Funny & Interesting post by Tim Harford on Polygamy

Links to a few E-Petitions:
Teach our kids to code
Tax Justice
Remove ban on gay people donating blood
Legalise cannabis
British Support for Palestinian Statehood

Wednesday, 16 November 2011

The Great Unravelling

The European Central Bank intervened in debt markets yesterday & earlier today, driving down (ever so slightly) bond yields. Those bond yields are now already back up to where they were before the intervention, according to the FT.

French-German bond spreads have widened at an alarming rate, indicating that France is about to get sucked into the vortex of 'peripheral' countries with dubious abilities to handle their debt burdens.

Meanwhile unemployment climbs, with Youth Unemployment in the UK reaching the pretty scary figure of 1 million, with 2.62 million on the records unemployed in the UK. Growth in the first half of 2012 expected to be below 1% (in other words, the output gap is going to widen, if anything), and the only weapon governments are using to change this is the terminally ineffectual Quantitative Easing program, which they are hindering with fiscal austerity. Experience has shown us that the money is being using to shore up balance sheets, not lend to businesses and as a result the stimulative effect is very limited. QE should either be a 'helicopter drop' direct to businesses who need it, or else should come with strict lending requirements for the banks (for example, we can demand Banks improve balance sheets by doing more to raise capital, as opposed to shrinking assets). Consumer price inflation, by the way, is still at 5%, although it is expected to come down, since wage inflation is low.

At the same time, in the US, it is now expected that 2012 will be (another) recession year, according to the Federal Reserve Bank of San Francisco. That will hurt exports in the rest of the world, and could well prompt the election of Mitt Romney, who is arguing for what amounts to starting a Smoot-Hawley style trade war with China (which he excuses on the grounds that there is already a trade war going on between the two countries, apparently).

This really is a quite terrifying situation. If the Eurozone breaks up, as is looking ever more likely, then even the European Commission's cataclysmic prediction of 0.5% Eurozone growth in 2012 and 1.5% in 2013 look hugely optimistic (the same report puts recession in 2012 at a probability just a fraction under 50%).

This is all, very, VERY bad.

PS on the inflation issue, see this BoE report, which Krugman described as 'courageous'. The speed of declining Inflation estimates definitely look 'courageous' to me!

Mike Jones & Science

Mike Jones, a serially successful internet entrepreneur, has just announced his new Startup Incubator, Science.

But Science is an incubator in the 'real' sense - not just taking good ideas and transforming them into businesses, Science will be in the business of creating these ideas, endowing them with value and given them open ended deadlines to become hegemonic business forces.

I think its a fantastically good idea. There's been a lot of research in how to fund really amazing ideas and I think this is in line with a view of those ideas - long leashes and open ended deadlines for example. That will tend to attract talented people. Bring the right people together and there's no doubt they can do anything.

UK Uncut pay a visit to Dave Hartnett

Dave Hartnett is the Permanent Secretary for Tax in the Civil Service. In other words, he's the government's chief tax-man. Clearly, Dave's passion for collecting Tax from ordinary people won him his high ranking, £160,000 a year job; after a series of embarrassing errors, the Tax department sent letters out to over a million people demanding they make up for the Tax department's mistakes within just 3 months, or else they should face penalty charges & start paying interest (I'm not aware of the 1.4 million who were owed a refund being able to impose the same conditions on the Civil Service). Not everyone budgets to allow for high ranking civil servants' incompetence, so this caused real pain for ordinary families.

However, it seems Dave's passion for tax collecting does not apply to large corporations. After personally signing off on a deal to let off Goldman Sachs from £10m, he lied to the Treasury Select Committee about it. To quote from the Telegraph;

"Margaret Hodge, chairman of the Public Accounts Committee (PAC), said to him: "It seems to me you lied when you told the Treasury Select Committee on 12th September that, and I quote, 'I do not deal with Goldman's tax affairs'... we had access to a meeting on 8th December in the offices of your lawyers where it is stated that you had settled and had in fact shaken hands on a deal on their tax affairs."

"I did not lie," Mr Hartnett said. "I did not deal with Goldman Sachs tax affairs in the normal sense."
Ms Hodge said that Mr Hartnett was "playing with words" and his denials were "laughable." She told him: "It appears that £10m was lost to the taxpayer because of a deal you did with Goldman Sachs. We were ripped off."

The Goldman's deal is just the tip of the iceberg. Dave probably thought Goldman's £10m was just small change after he cut a 'sweetheart' deal forgiving Vodafone for their £6billion tax intransigence (Apologists to purists for citing the Daily Maily).

The inconsistency of his viewpoints seems a little strange, don't you think? Someone so eager to claw money back from the general public is, at the same time, more than willing to forgive enormous multinational corporations from billions of pounds of tax?

The apparent strangeness of Dave's inconsistent behaviour loses a lot of his mystery when you learn, one simple fact:

Dave Hartnett is the most wined and dined Civil Servant in the country.

From January 2007 to November 2009 we have 107 documented cases of Dave being taken out by big business and its institutional buddies (the second highest was a still high, but much lower 89). In other words, about every 8 or 9 days, Dave had his luxurious love of 'food and wine' (according to his Who's who) paid for by none other than the very people whom he was responsible for collecting tax from. Now we're told, this isn't a conflict of interest since, in HMRC's words, ... "If you are a jockey, you have got to get on to the racecourse." I personally can't get my head round this one, so readers please feel free to explain!

Go ahead, take a look at the data. It was collected by the Bureau of Investigative Journalism, a not-for-profit body based at City University London.

Dave Hartnett has been taking exorbitant subsidies for his expensive tastes. In return, he's been scamming the UK taxpayer, which includes its ordinary people and its entrepreneurs, small businesses and even the large businesses that plays by the rules.

This practice needs to end. Dave Hartnett needs to resign.

UKUncut recently paid him a little visit - this is a must see video - at a corporate tax event!

Tuesday, 15 November 2011

Michael Bloomberg acts very suspiciously

In what amounts to a declaration of war on peaceful protesters, and showing that give little consideration to whether a protest is peaceful or publicly supported, the authorities of New York City have moved in at around 1am to clear out real democracy from Zucotti Park. After banning the press from the site just before the eviction, New York's Wall Street Billionaire Mayor Michael Bloomberg said this was to "protect members of the press". This is literally the sort of doublethink you might expect from a tinpot dictatorship. Virtually all polls on OWS found that it had broad popular support among American's who felt informed enough to express an opinion either way. The protest was uniquely peaceful, but has been cleared out on the dubious grounds of being 'a threat to health and fire regulations' and 'restricting the public's access to the park', according to Mayor Michael Bloomberg

As usual, no verifiable evidence is deemed necessary to demonstrate claims such as '"New York City is the city where you can come and express yourself, what was happening in Zuccotti Park was not that.” despite the fact that very obviously, expressing themselves was precisely what the protesters were doing.

Moreover, the protesters had a great deal of popular support: polls between October and November consistently demonstrated a plurality of support, though approval ratings ranged from 59% to 22%. The Wall Street Journal released a survey on October 12th finding 37 percent "tend to support" while 18 percent "tend to oppose" Occupy. An October 13 survey by TIME magazine found that 54 percent of Americans have a favorable impression of the protests, while 23 percent have a negative impression. An October United Technologies/National Journal Congressional poll found that 59 percent of Americans agree with the movement while 31 percent disagree. An October 18 Gallup poll found 22 percent of Americans agree with the protest's goals, while 15 percent disapprove and moreover 25% approve of the way the protest is being conducted, as opposed to just 20% who disapprove. Gallup found that Democrats, Independents and Republicans all follow the news about OWS in equal numbers, and those who closely followed OWS were more likely to approve of its goals and methods. An October CBS News/New York Times polls found 43% of Americans agree with Occupy Wall Street while 27% disagree. An October Rasmussen poll found 33 percent of Americans have a favorable view, while 27 percent are unfavorable.

Admittedly there was one poll, on November 3rd done by Quinnipiac University finding 30 percent of have a favorable view of the protests, while 39 percent do not but this is clearly the black sheep of the polls, since an ORC International poll released at the same time found 36% said they agreed with the overall positions of Occupy Wall Street, while 19% say they disagreed.
Another poll by Quinnipiac University in New York City, where of course people were most informed about Occupy Wall Street, found that an amazing 67 percent of New Yorkers approved of the movement with a mere 23 percent disapproving. The results also found 87 percent of New Yorkers find it OK that they are protesting. Despite media criticism that the protesters views are incoherent, the poll also found that 72 percent of New York City voters understand their views. All in all, even Fox News has admitted that the Occupy movement is now much more popular than the darling of the right wing, the Tea Party, who would openly bring guns to their protest and not face dispersal.

Its clear now that the authorities have once again stepped far out of the bounds of acceptable democratic practice, cracking down and arresting peaceful protesters who have done nothing wrong except to use their public land to demand a government that does not act solely in (a narrow definition of) the interest of the 1%. The protesters are, afterall, members of the public, using the land for a popular and widely supported activity, particularly supported by the New Yorkers who supposedly cannot use the land. The emperor has no clothes.


The Courts have issued a temporary restraining order against the police WOOHOO! Occupiers are marching in their hundreds to reclaim Zucotti Park from the tyrannical dictats of a Wall Street Billionaire who for all intents and purposes purchased his mayorship. Reports say the police are refusing to abide by the court's order and are now in contempt of court. Abiding by the Law it is clearly demonstrated now, is not necessary for the rich and powerful - only the poor, marginalised and dispossesed. Whilst 150 or so protesters have been arrested, I predict not one policeman, far less Michael Bloomberg, will be charged.

Monday, 14 November 2011

Insider Trading by US Congressmen

US Congressmen have had stock portfolio's that have outperformed even the highest performing category, hedge-funds

The essence of the issue is straightfoward - senators in particular but also congressmen have enormous access to private information. Since there are legislative protections that mean Congressmen can't go to jail for insider trading, they obviously use this information and profit from it wildly - even more than hedge-funds, it seems (Senators beat the market by 85 basis points). If any ordinary person did this, they'd go straight to jail (look at Rajaratnam, hardly himself a member of the common people, who now faces 11 years in jail for insider trading)

Evidence Based Reasoning

If you are really conducting evidence based reasoning, then its important to be able to state not just the evidence that gave you your belief, but also the evidence that would overturn it. This allows readers to judge your sincerity (for example, if I held the belief that rich people are better people and I will only change my mind if I see that rich people donate less money to charity than poor people, then its clear my views whilst supposedly evidence based are not really, since the evidence I am requiring is wildly implausible and not closely connected to what I am arguing).

On the issue of higher education funding, I am happy to agree that the arguments I've made earlier no longer apply if:

1. These degrees are not mostly taken by richer students, or students from richer backgrounds.
2. There is strong, new evidence that there are high social returns to Arts degrees. (for example, a review article comes out in this literature that posits different findings to the ones I have cited).

I think, its plausible that either could happen. If they did, then the arguments I've advanced no longer apply and so I would retract them.

Scattershot thoughts on The Eurozone (a bit wonkish)

Fresh from a dinner with an international economics professor and an international political economy professor (no prizes for guessing which ones), I've been thinking more about the problems in the Eurozone.

Various views were expressed and some of the debates we had, all great food for thought, are published below:

1. The crisis represents an opportunity for policy entrepreneurs to push through new integration, particularly in the Eurozone. The 'mask and shield' argument, applied not to the law but to economic policy.

2. A very eminent professor of international political economy with specialist European knowledge predicted that the ECB would ultimately become a lender of last resort - but only for a limited Eurozone of France, Germany and core-Satellites, but with the peripheral economies stripped out.

3. The ability of France to remain in the Eurozone was called into question in the long run, not a subject I had wondered about previously but given the path of the crisis so far, with various countries slowly being dragged into trouble by the contagion that started out as just Greece, it has to be up for question.

4. Another concern is - can the ECB actually solve the problem? If the ECB promises unlimited fire power behind shakey debtor nations, would this lead to them simply monetizing peripheral debt? That could potentially bring about a hyperinflation catastrophe scenario, or it might just rule out one of the multiple equilibria and thereby quell bond markets. My guess is the later, but can we be sure it won't be the former?

5. What capacity do these new technocratic governments in the peripheries have to bring deficits and debt under control? Probably not much. At the end of the day, they still have to overcome groundswell political opposition, which may not be as straightforward as they think.

6. Interestingly, inflation concerns were raised, which personally I disagree with strongly as its hard to see a wage-price spiral in the absence of any wage inflation, which is being held down by historically high rates of unemployment. Current high inflation in the UK was raised, which I put down to temporary fluctuations - devaluation, VAT rises and volatile Commodity Price upticks. This is reasonably testable - in inflation continues to rise over 2012 then I will be wrong, if it falls back sharply to around 2 or 3% I will be right, if it gets to mid 2012 somewhere between 3% and where it is now (around 5%) then doubt will remain. (nb, ceteris paribus).

This is a big moment for the European Project.

Thursday, 10 November 2011

Higher Education - The Case FOR (some) cuts!

This post is going to be extremely unpopular I suspect, but I think I want to layout a basic case for some public spending cuts in Higher Education (which may or may not best be offset by increasing spending elsewhere in HE).

I've argued in the past to friends that while there's enormous hypocrisy in the arguments we're presented with for slashing teaching grants for arts, there is a certain degree of logic to them.

Studies suggest (sources to follow shortly) that about 2/3 of the gains from Higher Education are private, not Social.

Today, I accidentally sat through an Art History Lecture at the University of Oxford.

A few things struck me:

1. I was the only non-white person in the room, and my presence was an accident. (There were literally two people who were sufficiently 'tanned' that they MAY not be from Europe , North America or Australasia).

2. Unlike the melting pot of Physics or Computer Science lectures, everyone was immaculately well turned out, well dressed and thin. The room looked very (upper) middle class (a few exceptions, and based on subjective judgements though).

3. The knowledge I gained from being in that class was of extremely low value to society but may have been of extremely high value/interest to a private individual. I literally cannot imagine how I might use the knowledge to society's benefit except as a way of trying to bring the whole thing down. In essence the lecture was about the relationship between Patrons and their artists, although the title was 'Creation and consumption, Patronage and Audience'

I was essentially observing a bunch of Upper Middle Class Kids, get Lectured by an Upper Middle Class Lecturer, on things that are of interest to virtually exclusively Upper Middle Class People, all of whom (with the possible exception of 2) were of caucasion background (less suprising given that the lecturer informed us that Art, with a capital A, as studied in the literature has been produced by the West).

My suspicion is that the social gains from this education are very minimal indeed. What will these people go on to do? Some will go into art history academia, which will continue to benefit the same middle class white people that study it. Presumably most will get an office job which benefits little from a thorough grasp of how the relationship between patron and artist changed art and was changed by it. Almost all the actual benefits will go to the student who had the benefit of enjoying three years of studying something they love.

I'm all for people being able to study something they love for three years without many thousands of pounds of debt hanging over their heads. But since a preponderance of those doing these degrees are very upper Middle Class, providing public subsidies to this stuff is mostly subsidizing the rich and powerful, whose parent are already willing to subsidize their passion to learn.

Why should the public be paying for this?

Its actually true that ending subsidies will put these subjects outside of the reach of poor people, particularly because even private income returns to Arts degrees may be negative, particularly for men. But how many poor people are reaching for them in the first place?

Arguing that we cannot allow this injustice misses the key point that this has the potential to right far more serious injustices and as a result, the conclusion does not follow from the premises. Subsidizing these degrees is regressive since most of the money goes to the well off. Poor people shouldn't have to pay for that. If you're a fan of more liberal access to higher education, then by all means argue for using the money to improve access to more education in Physics, Chemistry and Computer Science. But there's no good reason to tax the poor to give the rich purely private gains. Any gains to particular poor individuals are far outweighed to the gains to (necessarily) much large group of equally deserving individuals who pay the cost of the policy, whether in higher taxes, or having to give up hope of getting a masters in Climate Science.

When funding is cut to the NHS, the poor speak out, and loudly. But when it comes to cutting money for whats termed ' the arts' but in fact refers to a specific type of art (mostly that consumed by rich people) the resistance is from liberal elites keen to maintain the cultural constructs that preserve distinctions that mark their taste out as 'Art' and the tastes of others less well off than themselves, as just 'art'.

In short, 'The Arts' are mostly studied by the well off and so subsidies benefit the well off at the expense of the poor. That makes these subsidies regressive. Whilst it may be a noble goal to increase access to the Arts, its silly to prioritize this over the sorts of goals that society's marginalised are actually striving for.

I will update this post with sources and other stuff soon.

Some useful reading:
LSE Report on the returns to higher education - split out by different subjects (note the negative returns to Arts degrees):

Journal of Econometrics article on the distribution of returns

Making the world better

Things that make the world or a country better, as in, a LOT better, rarely happen through the usual channels of power. I don't need a complex theoretical argument here because the evidence is overwhelming.

Gandhi & Chandra Bose
Nelson Mandela
Martin Luther King,
The Anti-War movement in Vietnam.

Now, don't forget that not everything that occurs outside the usual channels of power is a good thing - but current protests, which have lead to remarkably free and fair elections in one former dictatorship (Tunisia) already and have (finally) begun to shape the political discourse (ever so slightly) in the US, UK and elsewhere are arguing really for the basics that almost everyone agrees with - even, according to the recently released St Paul's institute report, the Financial Services professionals in the US.

Founding A Startup

Being a startup founder is hard, hard, hard.

Its a lot less straightforward than just getting up at 8.45am and mad-dashing to the easy, well paid standard job you hate.

Although you hear a lot about the motivational moments, the demotivational moments are far, far, far more demotivational than what you get in a normal, milkround style graduate job. But, on the other hand, you hear stories like this that keep you going. Its a long shot, but damn it so what?

Sometimes, it all pays off though.

Tuesday, 1 November 2011

Samsung overtakes Apple as Leading Smartphone Manufacturer

So far I'm a bit light on Technology and this is actually a quite interesting development. Android's continued growth is exciting but we should be cautious about this factoid:

1. Apple's iPhone sales last quarter are said to be depressed due to consumers holding out for the 4s
2. Unless Android can get a hold in the tablet market, Apple will have another Ace in the platform wars.

Also, obviously note that Samsung's are cheaper and have lower margin's than iPhone's, and Apple's domination of the profitability of the smartphone market is still astonishing.

So its worth chronicling & elucidating this issue - is Samsung's overtaking Apple as the main smartphone manufacturer a mainly driven by Android's growth, or Apple's temporary weakness? Next quarter the results will be in...

Monetary Policy - Brief NGDP Target Update

So a bit more reading around the nominal GDP targeting approach reveals that there are a few different arguments pro/counter:


1. Expectations in a liquidity trap are of future loose policy
2. Provides 'political cover' for extreme Central Bank intervention via QE and higher inflation targets.
3. Nominal GDP Targeting performs better when hit by supply side price shocks.

1. NGDP Targets do badly at handling persistent supply side technology shocks (think RBC)
2. NGDP is more complex than Inflation as a target. If analysis of the model implies consumers/businesses looking to the future, seeing loose monetary policy and therefore adapting today's purchase decisions, then agents in the model have to understand how the model works. If they don't then who knows what could happen to expectations, and hence, outcomes?

But then as a counter to the Con, don't most RBC/Chicago guys think prices are basically flexible and therefore monetary policy is basically ineffective & the economy more or less is always at social optimum? In which case, presumable they're not much bothered about Monetary Policy (although obviously fiscal policy has been attacked on very thin theoretical grounds by Cochrane and Fama -basically a crowding out argument, but badly made-).

Monday, 31 October 2011

Fiscal Policy - No Brainers

1. We have a demand shortfall crisis in the economy.
2. We have a long term structural deficit problem.
3. David Cameron says we need to focus on the deficit.

But he also says that we should abolish investment expensing in return for an across the board corporation tax cut.

In other worse, we should increase the marginal cost of investing in machinery and plants in this country (and thereby creating demand) and we should decrease the cost of hoarding profit, which will probably be saved precisely because there is a demand shortfall and so investments have to be more cost effective than ever in order to justify themselves. So the policy in balance does little or nothing to solve the deficit problem (because abolition of investment expensing is offset by corporate tax deductions) whilst worsening the demand shortfall (by increasing the marginal cost of investment decisions).

This is a no brainer.

Monetary Policy

As the Oxford Class of 2010 know, at least partly from the scarring experience of our Macro Paper, there are serious limits to inflation targeting.

Firstly, from an expectations perspective, it leaves us seriously vulnerable to a deflation trap, as when if the interest rate hits the lower bound, we lose monetary policy as a vehicle for boosting the economy. Realizing this, consumers expect low core inflation or deflation and so are encouraged to save - reinforcing the deflation trap. Interest rates can't go low enough to move some of these excess savings into investments and so they effectively just lie around doing nothing -perhaps getting parked into treasury bills- when they could be financing small business investment for the credit constrained etc.

An increasing voice seems to be building from the US Policy Community for Nominal GDP Targeting. From what I can make out, this works a lot like a price level target in so far as, when the economy falls from its intended path, the expectations of future loose monetary policy (and hence inflation) encourage spending now leading ultimately to a lessening of the threat of a deflation trap. The Nominal GDP target is being endorsed now by Krugman and Christina Romer, as well as tacitly perhaps by Mankiw and even Jan Hatzius from Goldman Sachs.

I think its clear, from the appalling Unemployment situation on both sides of the pond (8.1% over here, 9.1% over there -and that's not including those withdrawn from the labour pool or of course those in jail- about 1% of America), that governments have to do more. Moreover, there are two clear reasons to prefer solutions to come from central banks and monetary policy over parliaments and fiscal policy - which is that whilst fiscal policy can certainly restore the 'flexible price equilibrium' income, it cannot create the optimal composition of that income. This is because monetary policy can ultimately leave it to consumers and businesses to choose how to spend their money, whilst fiscal policy in the shape of spending (tax cuts in a depression just get saved, afterall, if the Marginal Propensity to spend is falling and interest rates stuck at 0 are not providing sufficient incentives to invest) must be spent on specific 'pet' projects. Those projects may or may not be societally optimal (there's a standard caveat to this point which is public goods provision as well as a less obvious but important counter argument here about dynamic effects and the possibility that government interference might change the optimal outcome but I honestly don't see it as being enormously important, I'm assuming that the flexible price outcome is the preferred one). The second point is the fiscal issue - whilst inflation would tend to reduce the debt burden, expansionary fiscal policy would do the opposite and so lacks 'political support' in both the UK and US (specifically, it lacks the support of necessary numbers of MP's and Congressmen). Whether it ought to do so or not is another issue, but clearly as long as political power remains distributed as it currently is, large fiscal stimulus seems impossibly optimistic.

If you accept these points, then I think the case for Nominal GDP Targeting becomes hard to refute. It will lead to higher core inflation in the short run most likely, but then, the real costs of inflation come from variability and unpredictability, rather than its level per se. Moreover, a bit higher inflation would be no bad thing.

Incidentally, if the BofE or the Fed moved to an NGDP target, then there remain questions about how it would meet its target. To move the UK out of its current doldrums would require enormous monetary stimulus which would probably have to take the shape of QE. QE is growing unpopular politically, being seen as a sort of backdoor bailout. Perhaps the next round could come with stricter lending regulatory requirements for small businesses?

Sunday, 30 October 2011

European Central Bank - Modelling its Behaviour (wonkish)

As Shakespeare anticipated, sorrows have struck Europe not as single spies but in battalions. Fiscal and Financial woes abound, not to mention the political (not much sign of leadership from Brussels as Sarkozy tells Cameron to "shut up" and that he is "sick of" him whilst Berlusconi, Europe's most famous comedian, denounced Angela Merkel as an "unfuckable lard arse").

I want to interpret the events in Europe through the lens of two different models, to see what each might say the future holds for Europe.

Specifically, I want to look at the issue of the European Central Bank. A new ECB President is imminent, and many in the press are saying that only if the ECB agrees to provide full backing to governments with high yield sovereign debt (essentially via offering to buy their debt by 'printing'* money) can the crisis be averted. Under the previous ECB President, Jean Claude Trichet, such a move was ruled out (JCT is said to be heavily influenced by the German experience of hyperinflation and therefore anything remotely similar to monetizing the debt is a big no-no).

Realist models, like those of Geoffrey Garrett, tend to hold that the institutions of the EU are held on a tight Principal-Agent rope, and so their choices simply reflect the interests of the member states as a unanimous body. Policy change from the ECB, therefore has to be unanimously agreed and Draghi will probably just hold the line his predecessor did - no bailouts for 'bad behaving' governments. Neofunctionalists on the other hand hold that individuals can 'go native'. Mario Draghi, as the President of the ECB, would oversee an enormous expansion of his own power if the Central Bank were to gain the ability to act as a Lender of Last Resort, which is effectively what we are talking about here. So, the Neofunctionalists would tend to see the crisis as being solved by Mario Draghi pushing his own agenda. Of course, in order for that to go from being Draghi's preferred solution to policy, I believe in this case the Germans would in fact have to sign off. That in turn would require approval from the Bundestag/Bundesrat, which is, to understate, a challenging prospect.

Realists like Sebastian Rosato are publishing in recent editions of International Security saying the EU will stagnate or collapse. Of course, realists have always been saying this. Many neofunctionalists on the other hand see this crisis as an opportunity for policy entrepreneurs to push through an expansion of European Institutions' power, including the ECB's power to act as a Lender of Last Resort and also for the EU to jointly offer Eurobonds. The next few months and years will not be a clean cut empirical test of these theories, but it will come close. Whilst I think the case on how the ECJ functions is more or less closed now, what happens over the next few months will give us an important way of thinking about how the ECB functions, and the ability of Europe to handle a crisis that the ECJ cannot solve, with force majeure. If this crisis leads to increased integration in the Euro-zone, Realist models will be discredited and realist theorists of the EU will have to head home, not in single spies, but in battalions.

(Apologies for the likely shortfalls in spelling and grammatical accuracy in the above).
*Obviously no printing is actually done when a central bank engages in 'printing' money.

Unreasonable Protests: Progress at last.

To begin with, two quotations:

"The reasonable man adapts himself to the world; the unreasonable one persists in trying to adapt the world to himself. Therefore all progress depends on the unreasonable man."
George Bernard Shaw

"It is no measure of health to be well adjusted to a profoundly sick society."
Jiddu Krishnamurti

I have been seriously concerned by the poor quality of press reporting of the Protests outside St Paul's. Those protests are an attempt to bring about a more democratic society - one in which businesses and people align their interests for long term good, rather than short term considerations.

With regards to debunking press myths:

1. St Paul's was forced to close because of the protests.
St Paul's voluntary decision to close has been described as a "hysterical overreaction" by the Bishop of Buckingham and many visitors and indeed Clergy have echoed this decision.

2. 90% of the Tents are empty
Again pure fabrication. Naturally, its quite difficult to spend two weeks in a tent, especially when you have outside commitments, family, girlfriends etc. But people do spend most of their nights in their tents. The 90% figure has been disowned by the City of London Police and the thermal imaging photos have been shown to be nonsense- for which the protesters are now suing the offending papers via the Press Complaints Commission.

3. Occupy London is an anticapitalist protest.
Going to have to rely on primary research to make this point. Some of the protesters see the problem as being capitalism, but they are definitely the minority. In general, the problem is seen as being 'corporatism' - which is to say enormous institutions that have become not just economically but politically powerful, and have used that power to line their own pockets and the expense of ordinary people. I cannot find the words 'Anti-Capitalist' on www.occupylsx.org.uk

There are many, many more, but I don't have time for them. These are the main ones. Some other things worth observing:

1. How many times have I heard "I am for the right to protest but" - and how often is this 'but' something along the lines of: "in this particular case they should be moved on/cleared out etc etc". Its somewhat hypocritical to claim you are for the right to protest but every time someone does, you are for their being removed/kettled etc!

2. I have never, ever, ever met such a diverse group of interesting people. Almost without exception, the people protesting are eager to learn and to listen - much more than can be said for the people desperately eager to dismiss the protesters without so much as spending half an hour listening to their diverse views, beliefs and aspirations for a more democratic country.

3. They have no specific manifesto. True. But then, the movement has existed for a couple of weeks. Other movements have had decades to build their demands and policy making infrastructure. Occupy London is just building that infrastructure now. What comes out may not be a specific list of demands, but may take the form of a set of proposals, or ideas intended to set the agenda rather than define precisely the exact laws that parliament should pass. But this reflects the facts that above everything else the protesters are democrats- and believe that no small group, even one so well meaning as themselves, should be able to define and dictate laws to the rest of us. Unlike parliamentarians, bankers and naysayers, they are at least consistent in this respect.

Thursday, 20 October 2011

Intergenerational Externalities

This is going to be the opener in a general discussion over the extent to which the younger generation of this country - people born from the 1990s to today in particular- are effectively having an economic war waged on them by the powerful political & economic classes.

I want to make a few observations with regards to a disparity between the rhetoric and the actions of today's politicians.
  1. We hear prominent government politician's say that "Racking up 400m of debt in their [our children's] name every day is not right" And yet one of the proposed solutions to this debt problem is to raise tuition fees which of course is a much more direct way of increasing young people's debt! This obvious contradiction is generally totally ignored and worse still, there's no evidence that fees increases will actually decrease young people's liability for public debt and all the while Britain lags behind the average % of GDP spent on higher education (look at the highlighted columns).
  2. At the same time, the biggest threat to young's people's long term security, far from being debt, is of course, the coming climate catastrophe. The significance and impact of Global Climate change cannot be understated, but in the context of a recession, the issue that constitutes the single biggest threat to young people today is totally forgotten in the political discourse.
  3. Moreover, whilst the depression and/or jobless so-called recovery continue, the political classes in this country continue to obsess over one thing: the deficit. Despite the fact that interest rates have hit record lows according to our own prime minister, the economic focus is still on cutting the deficit! In spite of the mounting evidence that even financial institutions see the current approach as wrong, the government continues to obsess about the deficit and not the real crisis of increasing unemployment. Unsurprisingly, this is a policy that hits young people more than anyone else.
It is no wonder really that young people are becoming ever more angry and frustrated with a system that leaves them ever more marginalised and irrelevant. I wouldn't be surprised if the world over, young people started rejecting these systems and ones like it and searching for something new...

Oh... wait ...maybe ... I ... am ... a ... little behind on this.
(I was going to have a link for every word but I got bored because there were so many).

NB: Note that this post is an attempt to chronicle, rather than elucidate or forecast. (That stuff will come later). Specifically, I want to chronicle the disenfranchisement of young people and my views on it.

Tuesday, 4 October 2011

What is Prices and Values?

Hi, I'm Ravin Thambapillai and this is my blog, Prices and Values.

Prices and Values is of course a pun on a famous Oscar Wilde phrase - that cynics are the people that know the price of everything but the value of nothing. Prices and Values is an attempt to assess, realistically, developments in Economics, Politics and the Technology business world.

Sure, there are a lot of blogs out there on all these issues. And whilst I have some experience in all three (I read economics at Oxford, where I also founded the Oxford International Relations Society and I've also worked at Google for a year) I'm no Nobel Prize Laureate, Harvard Professor or World Famous journalist turned Venture Capitalist.

So why write a Blog?

There are three things I want to achieve with this blog:

1. Chronicle
2. Elucidate
3. Forecast

I want to Chronicle the developments in these fields, my thinking on these developments and where relevant, the academic discussion of the issues. Secondly I want to try to elucidate the developments - ie to interpret them through the lens of models. Interpreting events through a variety of different models means we can then test the validity of these models by making forecasts. This approach should, over time (if carefully maintained), help us determine which model of reality has the best fit. With any luck therefore, this blog should be an educative experience for me!

But obviously, any good blog has to be a discussion. Which means I'll be keen to get feedback, commentary, ideas, advice, criticism and even rebukes! So let the dialogue unfold! :-)

Tuesday, 27 September 2011

Prices and Values

Prices & Values is an attempt to examine both the costs but also the value of decisions made in politics and economics.