Wednesday, 18 April 2012


My wife, Helen Patterson MA MRCP PhD FRCR, died early this morning from metastatic angiosarcoma.

She was extraordinary in everything she did: as a wife, mother, doctor, rower, friend, and, for the last year of her life, as a patient.

I will not forget how lucky I have been.

Monday, 16 April 2012

Not a bad lefty

Tim Worstall, who is not a bad scandium oligopolist, has had a go at me for a comment I wrote in response to another post of his, in which he described state funding of political parties, which I've previously advocated, as "idiocy". He objects particularly to this comparison:
can you imagine a large corporation allow staffing for its CEO’s office to be paid for by donations solicited from suppliers and clients?
about which he writes:
everything that gets paid for in a corporation gets paid for from donations by suppliers and clients. Because they’re all engaging in voluntary exchange? It’s only tax which, being involuntary, is not a donation.
Apparently he thinks that business profits should be thought of as donations.  Obviously I know how businesses do in fact fund their operating expenses, and obviously that's not what I meant by donations (though one commentator sympathetic to me does say that I expressed myself poorly).  But to dispel any doubt, my comparison was with a CEO funding his office by soliciting money directly from interested parties.  Now that we've cleared that up perhaps Tim would like to answer the question - would a large corporation allow it? 

The logic of Tim's position is that political parties should see themselves as businesses aiming to maximize their income from donations.  I'm sure the governing party could make a much better job of that than it does now if it focussed its political decision-making on pleasing donors rather than concerning itself with what might be in the best interests of the nation.  I suspect the effect would be only to increase Tim's contempt for the government.

There's certainly little support on Tim's site for state funding.  Everyone hates the idea of giving unworthy politicians - that's all of them - any more public money.  Some commentators seem to favour the status quo, though I suspect that if asked they'd be strongly in favour of abolishing the current opt-out system operated by the Trades Unions, as the Kelly report recommended.  Others would like to ban large donations and just leave the parties to operate with whatever money they can raise from party members. 

I have some sympathy with the idea that political parties should be run more frugally: I'd like them to spend money on policy research, but not on the expensive business of advertizing themselves.  But as a policy proposal, just cutting the parties off from much of their income is a complete non-starter.  It seems to have escaped the notice of these hard-headed right-wing realists that the people who get to decide this are - would you believe it - party politicians.  Because whenever we have an election we persist in voting for party politicans.   So any policy that amounts to bashing political parties is not going to become law.

However, not being a hard-headed right-wing realist, I think that most people who go into politics do so in the belief that they can make the world a better place.  A lot of that gets worn away by the compromises they have to make on the path to power.  But still, somewhere in their hearts they would like to work without having to please donors as well as voters.  There are two practical obstacles to a system of state funding, which would be at a lower level than the current funding from donors.  One is the need to find a compromise between right and left on the maximum size of donation allowed, and the restrictions on Trade Union donations, as each manoeuvres for advantage.  The other is that politicians want to please voters.  I think a compromise can be found if the public wants one: the key problem is public support.

Let's help politicians govern well.  Fair funding is better than corrupt decision-making.

Saturday, 14 April 2012

Debt and Equity financing

Vince Cable wants to help Small and Medium-Sized Enterprises (SMEs) get funding, so naturally he set up a taskforce to consider what might be done.  The report they've come up with is eminently well-suited to its likely fate, which is filing in the round one.  Frances Coppola ably dissects its absurdities.

One problem for SMEs in getting access to corporate debt markets is that the costs of estimating their credit risk would be too large for the size of bond issue involved.  Credit rating agencies are pointless for sovereign debt, where all the information required is readily available to investors, useful for large enterprises, but too expensive for SMEs.  Securitization of mortgages got round this difficulty by pooling mortgages and then slicing the pools into tranches: that all ended in disaster because the quality of mortgages fell as lenders no longer had to hold them to expiry, and because high correlations of default made the best-quality tranches much less secure than investors (and ratings agencies) supposed.  The report recommends an "Aggregation Platform" to bundle and securitize SME loans: this would have the same problems as bundling mortgages, but default correlation would be higher and recovery rates much lower.  And no investor is going to make the same mistake again, nor even the ratings agencies, at least not yet.

The report notes that
The Taskforce has sought to estimate a level of finance that would be required by businesses. This requirement could be met with retained earnings or equity, but the analysis focuses on how much additional credit is likely to be needed.
Why not encourage equity investment instead of exploring divers unsound proposals for making borrowing easier?  The report doesn't say.

Let's at least stop using the tax system to discriminate against equity investment.  That means allowing dividends to be paid out of gross earnings, as is debt interest.  We can get some of the money back by taxing dividend income at the same rate as earned income.

Wednesday, 11 April 2012

Uncharitable donations

The government says that it is concerned that rich people may be avoiding tax by giving money to charities which do not "do a great deal of charitable work".  This follows a report in the Telegraph of an interview George Osborne gave them in which he included charitable donations as one of three "aggressive avoidance schemes" he wants to crack down on, based on a confidential report prepared for him by HMRC.  "Mr Osborne insists that he wants to protect and encourage philanthropy, but Treasury sources say the system is open to abuse as people are giving money to foreign charities which they have often established themselves."

There is something very strange about this.  Tax relief on donations to a charity is available only if the charity is "formally recognised by HM Revenue & Customs (HMRC) for tax purposes."  If the HMRC is unhappy about the validity of a foreign charity all it has to decline to recognize it for tax purposes.

I think talk of fake charities is a smokescreen.  If the government were genuinely concerned about what charities are doing, it could instruct HMRC to check them more carefully, or, if it thinks that's too difficult for HMRC to do properly, it could allow tax relief only on donations to charities registered in the UK.  I think this is simply a tax grab from charities genuine or not, which the government doesn't have the courage to admit to.

It's only fair to point out that there is support from the left for Osborne's view of this.  In the face of such an alliance, I am on the side of the charities.

Friday, 6 April 2012

Left and Right Economics

Few if any of us form our basic political views after reading The Wealth of Nations, The General Theory of Employment, Interest and Money, or Das Kapital.  Rather, we cleave to economic theories we find congenial to our more fundamental beliefs.  But, in economic terms, what are those beliefs?

I see the economic difference between left and right as arising from a conflict in the functions of money.  Money, together with the property rights that make it useful, stimulates the production of goods and the provision of services of a price and quality the consumer finds attractive.  But it also provides a mechanism for the allocation of goods supply of which would otherwise be insufficient, assigning them to their highest value use. The first function requires it to be possible to accumulate unequal wealth by producing desirable goods.  The second function requires the division of wealth to be roughly equal, so that the highest priced use can be the best use also.  We have to choose how to accommodate these two opposing needs.

If you and I and everyone else were equally wealthy, you might choose to spend your surplus wealth on a larger garden, while I prefer to eat otoro - each goes to the person who values it most, so that maximum benefit is obtained from it.  But in practice the financial rewards for production result in inequality of wealth - otherwise they wouldn't work - so that scarce goods go to the people who can afford to pay the most - the rich man eats otoro in his large garden while the poor man dines on baked beans in his council flat.

The socialist places great weight on the best allocation of resources to consumers.  Therefore, he, following Saint-Simon and Karl Marx, adopts as his guiding principle "from each according to his abilities, to each according to his needs".  He believes, or at least hopes, that sufficient production can be achieved by state or communal direction - the common ownership of the means of production, distribution and exchange - without the need for the creative destruction of capitalist competition.  Practical experience of 20th century communist states has made this belief rather difficult to sustain.

The right-libertarian cares only about the stimulation of production: it pains him to see any interference in the flow of wealth to those best able to acquire it.  He thinks the optimal allocation of resources is whatever results from unrestrained economic interaction, perhaps leavened by private charity.  In his view the role of the state should be little more than the protection of property rights.  So far as I know this set-up has never been tried in practice, perhaps because democracies need to do more to satisfy hoi polloi, whereas dictators have no incentive to restrict themselves to protecting the rich.

Almost everyone has views somewhere between these extremes.  The left thinks that efficient allocation of resources is the important thing, but will allow enough incentives to production to create a good supply of stuff to allocate.  The right thinks that incentivizing production is the key: it hopes that eventually there will be so much stuff that a sufficient share will trickle down to the poor, but will allow enough redistribution meanwhile to avoid obvious inhumanity.  The centre seeks to compromise.

( This picture is confused somewhat by Keynes' teaching that in some circumstances - a low employment equilibrium - the right economic policy to increase GDP is to run a deficit and get the money to the poor, so as to stimulate demand. Some technocrats may be persuaded by this analysis to favour egalitarian policy even if it runs counter to their instinctive preferences.)

Related to the diference attitudes to the distribution of wealth is a difference in attitudes to communal ownership.  The right-libertarian wishes to avoid the Tragedy of the Commons by putting everything possible into private hands.  (Perhaps he denies the existence of Anthropogenic Global Warming because he can't solve the problem by selling the whole planet to the highest bidder.)  The left-libertarian wishes to minimise inequality by curtailing property rights and holding everything possible in common.  The rest of us will have views which depend on our social as well as our economic leanings.

There's a televised golf tournament going on now in Augusta, Georgia.  It's obvious that no expense has been spared in preparing the course.  If you prefer watching golf to thinking about economics, that's probably what you should be doing.  Otherwise, if seeing it makes you reflect on all the resources being expended on private golf courses for the benefit of a few privileged members, then you are a leftist.  If it makes you marvel at an economic system which can create such a remarkable spectacle, then you are of the right.

* * *

I don't suppose this analysis is original, but I've not seen it plainly stated.   Perhaps a commentator will draw my attention to a source I ought already to have read.

Monday, 2 April 2012

Trayvon Martin

For the past three weeks I've been following reporting from the USA of the killing in Florida of Trayvon Martin.  It's hard for an observer in the UK to believe that this can really be happening in a country we see as much like ourselves, only younger and brasher.

The undisputed facts are that a little after 7pm on the evening a 28-year-old Neighborhood Watch volunteer called George Zimmerman phoned the police to report a suspicious character within a 'gated community' in Sanford, Florida.  Disregarding the operator's advice, he left his car to follow his suspect, who was the 17-year-old Trayvon Martin.  Five minutes later, there was a struggle between the two in which Zimmerman, who carried a licensed semi-automatic handgun, shot Martin dead.  Martin was unarmed - he had been to a convenience store to buy sweets and a drink, and was walking back to his father's fiancee's house, where he had been watching a basketball game.

Zimmerman claims that Martin attacked him, and he acted in self defence for fear of his life.  Under Florida's 'stand your ground' law, this defence allows the use of lethal force, and the burden of proof to overcome it is on the prosecution.  Zimmerman was released without charge the same night, apparently at the instigation of the State Attorney.  It has been widely alleged that police accepted Zimmerman's story without serious investigation, and that they would have proceeded differently had Martin not been black.  It's not clear to me to what extent the police may have been constrained not to release full details of what they've done, but a good deal of evidence has emerged to support the allegation against them, including a CCTV recording of Zimmerman arriving at the police station with no obvious injuries or blood on him, and an account by Martin's girlfriend of her telephone conversation with him while Zimmerman was following him: she says that she has not been interviewed by police despite their having been in possession of Martin's cellphone.

I find it utterly incredible that a legislature could pass a law that seems to give freedom to murder anyone capable of posing a physical threat provided one can shoot them unobserved - how could a claim of self-defence be disproved?  And nearly as incredible that the police seemed not even to attempt a thorough investigation of the claim of self-defence, in a case where there was a great deal of evidence potentially available.

I am reminded of the case in the UK of Tony Martin, presumably no relation, who was convicted of murder, reduced on appeal to manslaughter, for shooting two burglars at his farm, killing one of them.  I will not be emigrating to Florida.