Tzipi Livni

"Worthwhile Canadian initiative"

Witterings From Whitney has drawn my attention to this article in Newsweek. It's all pleasantly dull stuff, but well worth reading - a few highlights...

Guess which country, alone in the industrialized world, has not faced a single bank failure, calls for bailouts, or government intervention, in the financial or mortgage sectors? Yup, it's Canada. In 2008, the World Economic Forum ranked Canada's banking system the healthiest in the world. America's ranked 40th, Britain's 44th. Canada has done more than survive this financial crisis. The country is positively thriving in it. Canadian banks are well capitalized and poised to take advantage of opportunities that American and European banks cannot seize. The Toronto Dominion Bank, for example, was the 15th-largest bank in North America one year ago. Now it is the fifth-largest. It hasn't grown in size; the others have all shrunk.

So what accounts for the genius of the Canadians? Common sense. Over the past 15 years, as the United States and Europe loosened regulations on their financial industries, the Canadians refused to follow suit, seeing the old rules as useful shock absorbers. Canadian banks are typically leveraged at 18 to 1—compared with U.S. banks at 26 to 1 and European banks at a frightening 61 to 1. Partly this reflects Canada's more risk-averse business culture, but it is also a product of old-fashioned rules on banking.

That's all simple enough. Those strict rules on capital adequacy/leverage are there for a good reason. The UK government is doing its best to 'blame it all on the Yanks and the banks', but they have in fact been turning a wilfully blind eye to the burgeoning credit bubble ever since about 2001 or 2002. Further ...

Canada has also been shielded from the worst aspects of this crisis because its housing prices have not fluctuated as wildly as those in the United States. Home prices are down 25 percent in the United States, but only half as much in Canada. Why? Well, the Canadian tax code does not provide the massive incentive for over-consumption that the U.S. code does: interest on your mortgage isn't deductible up north. In addition, home loans in the United States are "non-recourse," which basically means that if you go belly up on a bad mortgage, it's mostly the bank's problem. In Canada, it's yours.

Ah, but you've heard American politicians wax eloquent on the need for these expensive programs—interest deductibility alone costs the federal government $100 billion a year—because they allow the average Joe to fulfill the American Dream of owning a home. Sixty-eight percent of Americans own their own homes.

And the rate of Canadian homeownership? It's 68.4 percent.

That's another thing that winds me up, and the Tories are especially guilty of this, is the idea that the taxpayer should 'help' first time buyers via whatever tax break. First time buyer are competing with other first time buyers. If you give them grants, or tax breaks then that increases the budget of all first time buyers equally without reducing the competition, so all that happens is that house prices go up accordingly, exactly like interest rate cuts.

And, to the extent that we have redistribution at all, surely it should transfer wealth from the very top to the very bottom, rather than transferring it from the middle to the middle, as did MIRAS? Like I always say, taxes on land values are the least bad taxes; so subsidies to property ownership are the very worst subsidies, they never achieve what they are officially supposed to do.

UK ten year gilt yields, info bleg

Here's a chart of gross yields to redemption (i.e. 'interest rates') since 1984 on ten-year UK government bonds (i.e. 'gilts') using series IUMAAJLW from the Bank of England's interactive database. For some infuriating reason, the series stops at April 2007, even series IUDAJLW, which says 'published 12 February 2009' stops at April 2007. Does anybody happen to know where I can download the last couple of years' worth of data? I've been Googling back and forth for over an hour and I just can't find anything useful. Click to enlarge:


UPDATE: with thanks to Lola in the comments, here are the yields from Feb 1999 to date (the y-axis exaggerates the movements, but it appears to tie in with BoE figures)

Let's just check what The Bill Of Rights 1688 has to say ...

Vis à vis the whole sory episode of Geert Wilders being prevented from attending a screening of his film Fitna at the House Of Lords, Denis Cooper points out (via email) that The Bill Of Rights 1688, paragraph 9 states as follows:

"That the Freedome of Speech and Debates or Proceedings in Parlyament ought not to be impeached or questioned in any Court or Place out of Parlyament."

Said is said.

Chris Huhne - one word too many

From the intro to his article in The Independent, on the topic of Geert Wilders:

Freedom of speech is our most precious freedom of all, because all the other freedoms depend on it. The decision to stop people from exercising this fundamental right must never be taken...

Excellent stuff, I'm with him so far. But then he does a DoubleThink and turns the whole logic on its head by ending that second sentence with the word "... lightly" and concluding that "It is precisely the prevention of harm to minorities that justifies the restrictions to Mr Wilders' freedom of speech."

Dude, WTF? "Harm to minorities"? Wasn't Labour peer Lord Ahmed threatening to 'mobilise ten thousand Muslims' who would march, presumably armed with pitchforks and blazing torches, on the Houses of Parliament? Who's threatening to harm whom here, exactly?

H/t DK

Rents and taxes - more or less the same thing

NB, for the purpose of this debate, I use 'rent' to mean sources of income that can't be competed away, as opposed to 'normal profits'. The 'rent' of a hire-car or of buildings themselves is not 'rent' for these purposes, but the additional rent that a landlord can charge because the building are on a particular site, or the grey market value of a taxi driver's licence or a pair of take-off and landing slots at a UK airport is.

1. Let's start with a nice simple supply/demand chart, and see how things change if there is an artificial restriction on supply (see 2.) or if a sales tax, such as VAT is introduced (see 3.):
2. I have a grudge against barriers to entry imposed by legal restrictions on the number of competitors (i.e. taxi drivers in London or landing slots at UK airports), especially where that industry is being subsidised and needs barriers to entry to stop those subsidies being competed away (e.g. nurseries, see update at end of this post), and worst of all are those industries that only exist because of a totally unnecessary regulation in the first place (such as removal of nigh-harmless white asbestos from buildings), who also want subsidies and barriers to entry (see update at the end of this post).

As you can see from the chart, if supply is restricted to less than its equilibrium level, the consumer (that's all of us, by the way, not some abstract concept) has to pay higher prices, generating super-profits for incumbents and people who would otherwise have entered the market are unemployed (or are forced to do something less profitable elsewhere). The super-profits have a significant capital value, for example a London taxi driver's permit or a landing slot at Heathrow.
3. All these bad effects are more or less exactly the same as what happens when you introduce a sales-tax, unless demand is very price inelastic, which applies to fuel, alcohol and tobacco duties. Politicians get away with imposing such 'sin-taxes' because nobody dares stand up for drivers, drinkers or smokers, but they get a tick from economists as well because these duties don't affect behaviour very much.

Apart from that - where supply and demand are both elastic, imposing VAT is not some harmless 'tax on consumption' (despite what decades of brainwashing by the EU says, or centuries of brainwashing by British governments before then) but reduces the profits of business and puts people out of business, as the chart illustrates:
The only difference between the second and third charts is that in the second chart the incumbents are getting the extra revenue and in the third it is the government, but from the point of view of consumers or people who are prevented from earning their livelihood, the effect is more or less the same.

Which is yet more evidence to support the generalisation that rents and taxes are the same thing, it just depends on how narrowly you define rents.

Fun Online Poll Results: What should we do with the BBC?

On a healthy turnout of over three hundred votes, the jury's final decision is ...

Privatize it - 47%
Abolish it - 30%
Keep it, along with the poll tax TV licence - 23%

I don't know how representative the views of the readers of this and Alice's 'blogs are, but that seems like an overwhelming majority in favour of privatising it or abolishing it (I fail to see a big difference between the two).

Fun Online Poll: Obama's trillion dollar bail out

I just don't get it.

In the UK, the Labour Party appear to have accepted that they've lost the next General Election and have gone for a economic scorched earth policy - interest rates are low (so can only rise); house prices are crashing; unemployment is soaring; sterling is at rock bottom and government deficits are off the scale. Fair enough, I'd classify that as 'bad' (as a taxpayer who will have to live through the recession/depresssion) but tactically, why should they make life any easier for the next Tory government?

Similarly, before he left office, George W Bush pumped hundred of billions of taxpayers' dollars into banks, presumably to help out his wealthy friends. Nobody in their right mind can imagine that this was for the benefit of 'Main Street', I'd classify that as 'sad' - it's a depressing fact that most politicians are in it to fill their boots.

Meanwhile, incoming US President Obama Bin Laden had a clean sheet. He could have done the sensible thing, blamed everything on George W Bush (fairly or unfairly) and, for example, gone for tax-cuts aimed at lower earners. But he didn't - he just doubled the size of the 'stimulus package' (a mixture of bail-out and pork barrel spending). So he has, effectively, scorched his own earth for the next four or eight years.

But why?

Is he really so stupid as to think it will help ('mad'); is he at heart a socialist who aims to keep the economy in ruins ('bad') or is he basically just corrupt ('sad')?

Click to vote here or use the widget in the sidebar.

Deeply gratifying Google searches

Quantitative easing for beginners.

Legal and economic incidence of a tax

It is actually nigh impossible arguing the finer points of economics in the 'blogosphere (but good fun trying).

It must be perfectly clear to anybody who stops to think about it that government bailouts cannot work, as they increase the tax burden on the profitable parts of the economy and transfer the proceeds to the loss making parts; or that minimum wages merely serve to condemn those whose earnings potential falls shy of that arbitrary threshold to unemployment; or that statutory maternity rights merely make it more difficult for young women to find good jobs etc. So much to the lefties, but this is a centre-right 'blog so there's not much point in me arguing this here (it's more fun over at LabourHome, obviously).

So let me turn to the faux libertarians, who also believe that they can suspend the basic laws of economics in justifying their own prejudices. Devil's Kitchen highlighted this, approvingly, as his Comment Of The Day in a debate on the respective impact on the productive economy of Sales Taxes (or VAT) and Land Value Tax (or Business Rates, Council Tax etc):
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I find it odd that the laws of economics magically change depending on the product being sold.

For instance, if my product is leased land, apparently LVT is a super duper tax that cannot be passed on by me, as the market decides what the rent is, and I have to absorb this additional cost and put up with it. Hurrah, we've bashed the evil landlord. Hurrah!*

However, if my product is a leased car, apparently VAT is an evil, authoritarian tax that is instantly passed onto the consumer, increasing car rents, causing plague, famine, and making landlords even more evil than before. Booooo. Evil landlords. Boooo*.

Strange that, eh?

* Georgist porn added for amusement value.
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Paul Lockett, Richard Allen and I went to great lengths to explain that the laws do not change; but that the laws apply differently depending on the relative price-elasticities of supply and demand, to little avail of course, but hey.

Luckily, Wiki has a nice short article on Tax Incidence to which I can refer you, which says exactly what any serious economist says. It covers the two extremes of

a) inelastic supply/elastic demand (which applies mainly* to property related taxes - the taxes being borne by the property owner, hence making it a largely voluntary tax - nobody is forced to own property - that does not impact on economic activity), and

b) elastic supply/inelastic demand (which relates mainly to alcohol, tobacco and fuel duties, making it also largely a voluntary tax - more importantly, these taxes raise a shedload of revenue under the guise of 'discouraging harmful behaviour' without actually affecting people's behaviour very much at all).

Wiki covers the intermediate case - elastic supply/elastic demand - i.e. most other goods and services, which are (in the EU at least) all subject to VAT with a diagram here. Such taxes do increase the cost to the consumer to some extent (which appears to be politically palatable, Heaven knows why) but more importantly - and far more damagingly - they also reduce the price received by the producer and the quantity produced, thus they have the most damaging effect on the economy, employment and returns on investment.

This has nothing to do with politics at all, it is borne out by observation and commonsense.

The question is, seeing as most people in the UK are both workers/investors and home-owners, why are they so willing to cut off their noses to spite their faces? £1 tax raised from property values costs them £1 (possibly slightly less, different topic), but every £1 raised from the productive economy costs them £1 and reduces the size of the economy - their main source of income - by a further 50 pence or £1.

Answers on a postcard, as ever.

* Land Value Tax applies mainly to non-agricultural land values, as land with planning permission is in fixed supply, but exactly the same logic applies to any 'asset' or 'right' which derives its value - or which generates super-profits for the incumbent - primarily because of naturally or artificially imposed restrictions on 'supply', such as 3G licences, pub licences, airport landing slots, taxi drivers' permits in London, oil and gas fields in the North Sea etc.