August 27, 2009
These poeple are Repower America are near insane.
For they are forgetting (if they ever knew) one of the most important points in economics. That of opportunity costs.
They're prancing around insisting that their plans to do this or that about energy system are a great idea because they will create lots of jobs.
But jobs are a cost of a scheme, not a benefit. So the 2.5 million jobs they say will be created are an argument against their plans, not one in favour.
Yes, it is backed by the unions.
June 16, 2009
Social Welfare: Is generational equity a scam or not?
Whether generational equity is a scam or not really depends upon how you define it. One such definition is that we take resources from those in work and spend them on the older generation who have finished doing so. I tend to think that this isn't a scam for of course that older generation paid for the younger when they were children. All we're doing is using the tax system to replace what was always thought of as intergenerational fairness. Parents take care of children, adults of the elderly.
A very different definition is possible though. This is when one generation completely consumes a resource, leaving none for successive generations. This is the sort of intergenerational inequity that drives concern over the climate change for example. Boil the planet a hundred years in the future for the sake of living standards now. Yes, that would be a scam, if it were to happen.
August 26, 2008
Adam and travel and meetings
You may or may not believe this but Adam Smith had a great deal to say that's relevant to the modern business life. Sure, I hear you say, some guy writing in 1776 can really help me plan a 21 st century business, right?
Well, yes, because he talked and wrote about the division of labour and the specialisation this made possible. That's pretty much what modern business is about, deciding what are the core competencies, the core functions of your company and then getting other people to do everything else for you. For example, it wasn't all that long ago that every major company had their own internal travel department. This simply doesn't happen any more, everyone realises that it's much better to use an expert, a specialist in group incentive travel for example.
Similarly, why struggle to work out how to hold a meeting, or how to incentivise people when you can use an expert: Meeting and Incentive Planner.
For example, say you need to hold a incentive management meeting. Do you really want to have to try and work out where to hold it, which hotel to use, which airline, which caterer? No, of course you don't, you would rather get on with doing what you know how to do, running your business, while someone else does all of that.
Exactly as Smith said it would work best: the division of labour and specialisation.Not bad advice for 200 years and more ago, eh?
September 20, 2007
The Eyebrow Theory of Economic Cycles.
Makes as much sense as most other theories about economic cycles.
September 18, 2007
Patrick Minford on The Rock
Excellent. So. to peple who are complaining about the way in which the risks of default are now spread throughout the financial system, Patrick Minford says:
The answer is No. In fact the spread of credit outwards from the well-heeled is one of the great triumphs of modern competitive finance.
By spreading the consequent risks around many well-capitalised holders they can be absorbed by the magic of 'diversification': by holding a wide spread of assets whose risks are 'not correlated', the average risk is reduced as in 'swings and roundabouts'.
It was this principle at work three decades ago that transformed company finance and governance through making possible the 'junk bond'; business has never looked back as entrepreneurs could use 'junk' debt to take over large sleepy companies.
So with the extension of credit to people; of course it is well-known that there will be default at a higher rate on this debt. But by opening up a market in it and spreading it around this risk can be priced reasonably.
This process is known as the 'completing' of financial markets. In 'complete' financial markets all risks that are not in principle uninsurable can actually be insured either directly or indirectly through the financial system.
This isn't a fault in the system, it's actually the whole damn point. That's not to say that there isn't a problem:
In fact what seems to have gone wrong is a failure of information in a rapidly developing financial environment.
It seems not to have occurred to anyone that there would be a need to know exactly what was in each securitised package - after all, the whole idea was to spread risk around so that it became relatively innocuous.
So when the worries about sub-prime mortgages surfaced no-one did know; and then of course there was general panic.
However the scale of any possible losses on sub-prime mortgages, even at its very worst, is not very large on the scale of the total balance sheets of the world's banks.
Therefore had all parties known what percentage they actually had on each particular balance sheet this could easily have been priced; the bank's share prices would have been adjusted for the prospective loss of profits and normal banking business would have gone on being done.
So the remedy for the systemic problem seems rather simple and will undoubtedly be adopted in future anyway: any CDO must have its contents on the jar, so to speak.
While we do actually want the risk to be spread around we'd actually really like to know where it is spread around. And given the results of our not knowing this time, anyone issuing in the future is going to have to tell. So, we'll end up with the system that we actually want. Widely dispersed risk with full information disclosure.
It might be that we don't actually need any new regulation after all. Markets do indeed make mistakes, but they also tend to learn from them.
September 17, 2007
Guardian Leader Shocker!
No, really, a terrible shock this is. The Guardian leader on Northern Rock. Gobsmacking in fact.
Asymmetric information is common. Supermarkets know more about their food than shoppers; employers cannot be sure prospective recruits have all those qualifications. But most markets try to correct that imbalance. Consumers should be protected by the Food Standards Agency, while licensed bodies certify exam results. There is also the power of reputation; questionable goods are swiftly recalled by any supermarket that values its good name. Whatever forms it takes, assurance is vital to buyers. Without it, markets may seize up.
Now all we need to do is get a few of the columnists to read it. Most especially that part about the way in which businesses try to protect their reputations: that being the greatest protection that consumers have over the quality of the goods on offer.
September 16, 2007
This Capitalism Thing
An interesting little number from Robert Fogel:
What we currently call the poverty line is so high that only the top 6 percent or 7 percent of the people who were alive in 1900 would be above it.
One century, to move 86% of the population from below the poverty line to above it. Pretty good record really, ain't it?
Naomi Klein and Hayek
Well, at least I think it was Hayek who said something like this (maybe Uncle Milt):
“The ideologues believe that a totally free market is a prerequisite for democracy, but also that it is more important than democracy and that given the choice between the two, therefore, the free market is preferable.”
Economic freedom or having to do what everyone else votes on? I'm for the former as Naomi Klein obviously is not.
Nick Cohen on Private Equity
I'm not sure that Nick Cohen is quite up to speed on how it all works:
Not all the private-equity buyouts of the New Labour years were asset-sweating operations - a study by Nottingham University found that employment rose after some takeovers.
Well, no. The research found that on average employment rose after private equity takeovers. That is, more often that not. A slight difference from "some".
Meanwhile, the AA as an organisation paid no corporation tax in the last financial year and its accounts showed that it ended 2005 and 2006 with the Revenue owing it money.
Yes, it was paying a lot of interest on its debt. (We'll leave aside the fact that companies don't actually pay tax anyway shall we? That idea of tax incidence.) That interest was then taxed when it turned up with the recipients of it.
They turned what was once a mutual association for drivers into a machine for generating private profits.
Well, yes, but Centrica (who did the original demutualisation) paid the members of the mutual association handsomely for it. £ 240 per member if memory serves correctly.
Nor can customers be said to have done well. Which? downgraded the AA from first to third in its list of reliable breakdown organisations and the RAC was left free to run attack ads highlighting the failings of Buffini's cash cow. RAC schadenfreude peaked in April, when one of its call centres received an emergency call from the AA pleading with it to rescue a patrol vehicle. It had broken down and the AA couldn't fix it.
Might be worth remembering that the RAC also demutualised in the late 90s. We've thus got two private sector firms (well three, obviously) fighting it out over who will get the customers. Usually regarded as a good thing, that. Competition, you know.
Anyway, to the massive relief of lefties everywhere I really don't think that this private equity thing is going to be much of a problem anymore. The credit crunch and the repricing of risk (somewhat overdue it was too) mean that it's simply not going to be as easy in the future as it was in the past.
September 15, 2007
Will Hutton on Mortgages
Klein would rightly damn the crazed belief in the view that markets are everywhere and at all times right, and rightly call at the very least for a return to the mixed economy formula of the immediate post war years. She would lambast the inequity and unfairness - and point to the supine way governments everywhere have surrendered the capacity to regulate before banks' arguments that regulation is necessarily inefficient and bad. It is good to have such a passionate advocate of a Keynesian/Galbraithian world view strutting her stuff.
Mixed economy of the immediate post war years. The nationalization of the commanding heights of the economy, wasn't it? With respect to mortgages, the mortgage queue, credit controls and the rest.
Deregulation and market forces were, paradoxically, enfranchising ordinary people. And they liked it.
"Paradoxically" is a near insane word to use there. Still, we can see where Hutton is coming from I think? The system which disenfranchised ordinary people is the one he admires. Quelle Surprise, the argument from one of the Great and the Good that the world runs better when the Great and the Good tell the proles what to do.