Ritchie grapples with supply and demand

Lloyds share fell slightly on news of the government’s placing. Ritchie tells us that this means:

It seems like the markets don’t like privatisation

The idea that prices might decline in the face of a 4.28 billion increase in supply seems alien to him.

27 comments on “Ritchie grapples with supply and demand

  1. By his own admission he didn’t pay attention in economics lectures at university. Presumably he didn’t pay attention at ‘O’ or ‘A’ level either

  2. I preferred the original headline (supply was typo-d to supple). Could have made for a nice “finish this sentence competition.

    “Richie grapples with supple and demand”s stiffer rent boys from the agency next time.

  3. Is there actually more supply ? Surely just some of the existing supply has changed hands. One Lloyds share still represents the same percentage of the firm’s equity.

    However there is now “less supply” (in your definition) to come to the market so the share price should go up.

    However the date for this “new supply” is probably closer, so the price will probably come down.

    Then there’s the 101 other factors impacting on the share price today.

    Tricky business this stockmarket stuff.

  4. @Shinsei,

    Same with anything else. If 30% of the population decides to sell their house this year there is no increase in the supply of houses in the sense that the number of houses that exist doesn’t change, there is however increase in supply in terms of the amount of housing that people are prepared to sell. And yes – it’s the actions of those who want to exchange that moves prices.

  5. Does that mean Ritchie believes the markets prefer state owned banks? Or perhaps he thinks they’re agin privatisation in general?

  6. Nonsense. The Government are selling the shares due to a reduction in demand. The reduced demand is what has resulted in an increased share price prior to today.

    As soon as George Osborne tried to sell the shares the supply of shares reduced and the price decreased accordingly. In basic political-economical terms, the price reduction is due to the private sector’s revulsion of itself.

    Rob, there’s a reason I didn’t listen to my economics lecturers. It’s because they were proponents of neoliberalism. And neolibrarians are always wrong because they are immoral.

  7. The short term market dynamics are pretty simple:
    The marginal buyers demand will have been largely fulfilled by the placing.
    However, the marginal sellers will not have been affected. In fact, a placing will likely increase the number of marginal sellers (those who bought in the placing will now be sitting on a small profit they might want to take).

    On a longer term basis, you would expect the removal of a large potential supplier of stock (the govt) to be beneficial for the share price… but the govt still have a long way to go before they are out.

  8. I just had a quick look – Lloyds is down 3.4% today, Barclays 3.0%, RBS 0.4%. No doubt Murphy can explain that.

    However, the expected market reaction today to this placement is roughly none. The sale was announced in June, and its size was declared yesterday, so there is little new information in today’s announcement. The market reacts to news: old information has already been priced in.

  9. Ritchie also believes the lack of candidates for the RBS top job is a sure sign of a lack of competition for it, so reduce the salary on offer. So he’s consistent.

  10. “The market reacts to news: old information has already been priced in.” (PaulB 15.06

    Old LSX saying:

    “Up on anticipation.
    Down on realisation.”

    Also been known to apply to share trading.

  11. If you believe in the supply-demand curve, you have difficulty in denying the existence of the Laffer curve since a reduction in net pay reduces the incentive to work.
    Murphy absolutely, vehemently, in all circumstances, denies the existence of the Laffer curve. So how*can* you expect him to believe in the supply-demand curve?

  12. John77

    Yes he denies its existence, expressly. However, read his raging against high effective marginal rates caused by means-testing benefits and you’ll find implicit acceptance of same.

  13. @John

    But the laffer curve suggests that the Murphy and the other communi courageous statists might have an ideology at odds with how reality works. Therefore it is not only wrong, but actively amoral.

    If it helps, don’t see them as agitators or ideologues. See them as the voodoo priests of a cargo cult.

  14. @ Ironman
    You may well be right.
    *My* raging against high effective marginal rates caused by means-testing benefits is partly because I believe in the Laffer curve and partly because I feel that it is unjust that people end up worse-off by working (travel costs to work, buying a sandwich or even just a hot drink to go with your packed lunch are ignored so *effective* tax rates can exceed 100%).
    However I have yet to be wholly convinced that there is any consistent logic behind Murphy’s tirades.

  15. John77

    My favourite recent Murphy stand-on-head is his statement that “all economists agree that employers NIC is all paid in lower wages for employees”. Let me emphasise: he concurs. This from a blogger who has quite explicitly denied any such tax incidence regarding CT.

  16. Would people please appreciate that the Laffer Curve is a curve with two sides either side of its peak.

    It doesn’t mean that taxes should always be lowered in order to increase overall revenues.

    RM often argues that taxes should be higher to increase revenue as he clearly believes we are BELOW the optimum tax raising level.

    (One can debate whether we are or are not at such at level).

  17. The Laffer curve doesn’t say that. It is simply a restatement of Rolle’s Theorem (itself a consequence of the Extreme Value Theorem) which says that a differentiable (read: continuous, with caveats) function that has the same value at the end points of some interval has an extremum (where the first differential of the curve goes to zero) at some point in that interval. Since zero tax rates raise no revenue, and 100% rates raise no revenue (because no-one will engage in economic activity that is taxed at 100% for any length of time) and since we know there is some revenue generated for rates in between, then there must be at least one revenue-maximising rate (under the assumption that revenue is strictly non-negative in the interval.) But the theorem doesn’t say how many maxima there are in the interval. If the revenue/rate function is discontinuous it can’t say anything. If the criterion of non-negativity is relaxed, then there can be a rate which minimises revenue (i.e. costs the most.) I think it’s the criterion of continuity that is the most problematical but things can be salvaged somewhat if we assume it is piece-wise continuous.

    Having said all that, Murphy is an utterly egregious fuckwit, so any reason he has for rejecting Laffer arguments are ipso facto wrong.

  18. The Laffer Curve is a highly dubious construct which arises, as David Gillies above says, not from empiricism but from a mathematical assumption. It sure as shit isn’t a restatement of the law of supply and demand.

    Additionally-

    since a reduction in net pay reduces the incentive to work.

    -is not entirely certain either. A reduction in the net pay per unit time worked may equally be argued to incentivise work, since the labourer now has to work longer hours to make the same ends meet. The argument really only bites for very high incomes where money is being earned without any specific usage of said money intended, at which point the person might say, “can’t be arsed to work if they’re taxing half of it” etc.

    I remember some big threads about this before, but the basic flaw in the (mathematically derived) Laffer Curve is the error of thinking of the taxed money as being “thrown away”. The 100% point describes an economy in which all goods and services are provided free by the State in return for total taxes. It does not describe a situation in which nobody works and therefore there is no taxed income. As such, the fundamental argument for the curve is wrong.

    That doesn’t mean that tax rates don’t affect total tax revenue. THey do. But for complex reasons, not represented in a meaningful way by the Laffer Curve.

  19. @ Ian B
    The Laffer curve is derived from the mathematical assumptions that a positive amount is greater than zero and that if you have a range of values there must be one of them that is greater than all the others (it is possible to have more than one point having this value), You think that this makes it a “highly dubious” construct. I think that you are talking through your hat.
    David Gillies has explained it, so there is no need for me to do so, but I will deal with your 100% concept (apart from it meaning everyone gets everything whether they work for it or not, so where is the incentive to work?). If everyone is taxed at 100% no-one has any after-tax income, so effectively no-one has any pre-tax income – everyone is a slave working for the state – and the tax take is zero.
    Your criticism of my comment is based on twisting what I said and then adding a “what if?” and involves a contradiction. You are claiming that the guy has to work harder to achieve the same net pay – which is not a reduction in net pay
    “The argument really only bites for very high incomes where money is being earned without any specific usage of said money intended, at which point the person might say, “can’t be arsed to work if they’re taxing half of it” etc.”
    What about those on tax credits where the tax take on overtime pay reduces the net amount to less than the cost of the Burger King “meal deal” at the terminus when he’s not going to get home until two hours after supper-time? *That* is when the guy is likely to say .“can’t be arsed to work”.
    .

  20. If everyone is taxed at 100% no-one has any after-tax income, so effectively no-one has any pre-tax income – everyone is a slave working for the state – and the tax take is zero.

    No no no, we went through all this before. If your wage is £100 and your tax rate is 100%, your pre-tax income is £100, not zero. The tax take is £100. There’s no “effectively” anything else about it.

    So far as I can tell from previous conversations everyone seems to mix up their moral objections (entrely valid, but irrelevant) with the arithmetic.

    You are claiming that the guy has to work harder to achieve the same net pay – which is not a reduction in net pay

    Of course it is. Per hour. They have to earn more gross (more hours) to take home the same net.

  21. I do like the way that Murphy classes a price fall as proof that privatisation is not a good idea, and a price rise as evidence that “other news has altered sentiment generally”.

  22. @Ian B: you seem to be missing most of the Laffer argument.

    The primary point is that this is not about the economy: it is about tax revenues. We have to assume that there is a background consumer economy where money, earnt through taxable economic activity, has an exchange value; but this economy is not the focus. It could quite easily be an entirely black economy.

    So at the 100% tax rate, people might still work, but if money were to have any exchange value then those workers would do what they could to dodge their taxes. Your alternative communist (not-quite-)utopia where the government employs everyone, takes all their product and then supplies the population out of what was produced is irrelevant because money has no exchange value. At a 100% tax rate, what does a worker’s pre-tax income of £100, or £1,000,000 represent? It is a meaningless figure. We would be through the looking-glass into communist economics. There are other arguments against such a system, but they are not grounded in maximising tax revenues!

    In fact, we don’t even need to assume that nobody pays tax at the highest rate. Let me try this assumption on you: less tax is collected very close to the upper bound (say at 99.99%) than at some point of lower taxation: that is, that you would collect more tax at a 50% rate (or whatever) than at 99.99%. Almost everyone buys this for some tax rate or other.

    Provided that you then agree that small adjustments to tax rates always result in small changes to revenues, there is still a Laffer maximum.

  23. I tried to leave a comment explaining Richie’s stupidity but unfortunately I am still banned after I showed in no uncertain terms that an income tax drop would be of greater benefit to the poor than a drop in VAT (he was arguing the contrary).

    My name has been mud ever since. I only wonder how a human is capable of being so stupid yet still able to breath.

  24. @ Ian B
    If all income is taxed at 100% then no-one has any income and everyone is a slave. In your imaginary utopia the phrase “pre-tax income” starts with “p” for “phlostigon”.
    You may have “been through all this before”, but if so, did you listen?
    You are changing my words again – this is getting boring. I refer to incentivisation not compulsion – you are playing the part of Pharoah’s overseer, saying the slave will work harder if he has to make bricks without straw. That is not an incentive according to the OED.
    I am not paid by the hour – lots of are not even nominally paid by the hour, and vast numbers who are nominally paid by the hour have no opportunity to work longer hours when the tax rate goes up

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