August 2010

Johann Hari: even when he\’s right he\’s wrong

Yes, he\’s absolutely correct that we should legalise drugs. No doubt about it.

Then he puts in absurdities like this:

You can see this any day on the streets of a poor part of London or Los Angeles, where teenage gangs stab or shoot each other for control of the 3,000 per cent profit margins on offer.

Facepalm. Is it actually necessary for graduates in \”social and political science\” to be innumerate?

You cannot have a profit margin over 100%.


A margin is, by definition, calculated as a percentage of the revenue and thus cannot be over 100%.

What he means is mark up, which is calculated as a percentage of the cost of goods and thus can be over 100%.

Even then he\’s wrong as he\’s got the teenage gangs fighting over the markup/profit from the entire supply chain, from coca leaf in the Colombian forest to the nostrils at the Tory Boy dinner party in Notting Hill. And of course they\’re not fighting over that entire sum, as several Colombian cocaine barons would be only to happy to point out.

countries like the US and Britain – both led by former drug users –

Must admit first I\’ve heard about the tooting habits of Our Own Dear Queen.

Quite so, quite so

And because they also, by and large, worked locally they had the knowledge to react locally.

Tax inspectors that is.

Because just as centrally organised, target driven, big business does not understand entrepreneurial spirit – which is the preserve of the more effective small enterprise that as a result makes better returns on almost all measures that can be used (and even higher returns on those that can’t be measured) than big business so did local tax offices actually perform better than centrally controlled big ones.

But those who HMRC have engaged from big business have not understood that. Or the importance of relationships. Or the importance of location. Or the importance of local knowledge. And those are very good reasons why we have a tax gap.

Bring back the local and the discretion that went with it was the message I heard, loud and clear. Anyone listening at HMRC?

Quite so.

It is of course slightly worrying to find myself agreeing with one R. Murphy. But he is, in this case, correct.

And as he\’s just shown, so was Hayek. Knowledge is local, you cannot plan things rigidly from the centre because of that locality of knowledge.

So while Ritchie is indeed correct here his correctness here rather destroys just about everything else he says about how the State should be doing everything for us.

Pity that really.

Right choice then

George David Weiss was born in Manhattan on April 9, 1921. He wanted to be a musician. His mother wanted him to be a lawyer. The ensuing emotional battle, he later said, drove him to consult a doctor.

As Mr. Weiss recounted in a 1995 interview with The Miami Herald, the prescription was simple. The doctor asked: “Mrs. Weiss, what would you rather have? A live bum of a musician or a dead lawyer?”

One of his is here.

In an interview with The Santa Fe New Mexican in 1995, Mr. Weiss described the making of one of his early hits, “Oh! What It Seemed to Be” (1946), written with Mr. Benjamin and Frankie Carle.

After finding a publisher for the song, the writers went in search of a singer. They called on Frank Sinatra, and a nervous young Mr. Weiss played it through for him.

“Before I had finished it Sinatra was on the phone calling the record company and telling them he just heard a great song and wanted to record it,” Mr. Weiss recalled. “You can imagine what happened to me — I froze at the piano. I just kept playing. See, the publisher had told me that no matter what happens, I should keep playing to make sure the tune got into their heads.”

He continued: “So everyone sat down and discussed horses and women and gossip for a half hour or so, and I’m still playing that song at the piano. Finally, the publisher comes over to me, lifts me up under the armpits and says, ‘Say goodbye to Frank.’ I said goodbye and they led me out like a zombie.”

On gamete donation

I believe the dignity of parents, donors and the unborn would be threatened by introducing marketplace values.

And without marketplace values there won\’t be those unborn to have their dignity threatened.

When are we English going to get over this distaste for \”trade\”?

American Apparel

Ethical clothing company not so ethical actually.

The confusing thing about Charney is his combination of out-of-control carnality and progressive social liberation. One industry insider calls him an \”odious character about whom I have heard nothing but bad things, particularly concerning his recruitment techniques and the way he treats female employees\”. There is, he adds, a \”certain over-reliance on oral sex during interviews over assessing their retail experience\”.

On the other hand, Charney is passionate about liberalising immigration policies, paying a fair wage, refusing to outsource manufacturing, and workers\’ rights. Virtually all of the company\’s manufacturing, distribution and retail is done in-house in downtown LA, by employees – the majority of whom are immigrants – who are paid more than twice the minimum wage, offered low-cost, full-family healthcare, and allowed free international phone calls during work hours.

Oh, and it\’s going bust.

Accounting fiasco

I don\’t really understand this.

OK, that\’s nothing unusual, there\’s lots I don\’t understand. Especially about accounting for banks.

But the point of a newspaper article is, at least I assume it is, to inform one so that one can understand the point being made.

And that point just isn\’t made. Sure, there\’s lots of \”disaster\” \”OMG!\” and stuff, but the actual point about what was being done wrong doesn\’t come through.

Anyone care to enlighten me?

This is going to be fun

Asil Nadir is back!

I don\’t even know what the charges are against him let alone whether he did any of the things alleged so I\’ll not pass comment on any of that.

What was fun though was what was going on in Polly Peck. It was all entirely legal even if a tad misleading.

The company would lend money to citrus growers so that they could afford to tend their crop. Then when the crop was picked Polly Peck would buy it, box it and ship it. The profits on this were ginormous and no one was really sure how they were being made.

Cue much speculation about dodgy business.

What was actually happening was that the loans were being made in Turkish Lira. At the time this was a very high inflation currency (over 50% I seem to recall) with similarly high interest rates. The loans carried these high interest rates. So, you\’re lending out money, you\’re receiving 50% or more in interest on the loans, excellent, that\’s a profit, book it to the P&L.

Massive profits!

But of course, a currency which is undergoing high inflation will, likely as not (certainly, over time it will, even if not each and every day or week) be depreciating. In theory it should depreciate according to how high the inflation is. Not quite, but roughly, you\’d expect 50% inflation to lead to a 50% depreciation against a currency that had no inflation. So while you\’ve got a huge profit you can book on the interest, you also have a huge loss somewhere on the currency.

You can book this to the P&L, indeed there are arguments that perhaps you should, but it wasn\’t a legal requirement that you did so. So, Polly Peck didn\’t. They wrote off such losses against the reserves, bypassing the P&L altogether.

One of those times when Ritchie\’s moanings about the economic substance of transactions in accounting having a real point. Pointing to the profit and very much not pointing to the associated losses. Quite possibly misleading but not illegal.

PP was borrowing in strong currencies (I seem to recall Swiss Franc bond issues, not sure) to lend out in that rapidly depreciating Turkish Lira, booking the high profits, writing off the currency losses and that\’s what made the machine work. It all fell over in the end, of course, the clue being that a company which was reporting such huge profits having an insatiable need for more borrowings.

I will admit to laughing when it was explained to me (Private Eye I think) how simply it was all done. One of the reasons it wasn\’t spotted earlier was that The City, the respectable part of it, assumed that there was something dodgy about the whole thing and therefore both didn\’t purchase the shares and didn\’t lend money and therefore didn\’t have teams of analysts going over the company books. All the information was there in the accounts, as it had to be, it simply required a close reading to grasp what was going on.

It was very much a small shareholder\’s stock: some of whom made substantial fortunes as it went from pennies to £32 (including stock splits etc) and of course many more who made substantial losses as the shares crashed back to ground again.

You would expect a personal finance editor to know this

Ian Cowie, really:

Regular readers will be familiar with the mathematics because I have been banging on about this since the Budget of March, 2007. Here’s one example of how the poverty trap works. Anyone entitled to claim tax credits – and that includes nearly half of all pensioners – whose annual income exceeds about £7,000 (believe it or not, neither HM Revenue & Customs nor the Department for Work and Pensions could tell me the precise figure when I called to check) has some of their state benefits withdrawn through a means test.

To be precise, claimants lose 39p of tax credit for every £1 of income above that limit. Then, like anyone earning more than £6,475 a year – the current personal allowance – they must pay National Insurance Contributions (NICs) at 11per cent.

Plus, to put the tin lid on it, like everybody whose income exceeds their personal allowance, they must now pay 20 per cent income tax instead of the 10pc they paid on the first £2,230 earned in the last fiscal year before Mr Brown cut off the bottom rung of the tax ladder. So, total deductions from the top slice of their earnings are 39per cent, plus 11 per cent, plus 20 per cent – or a total of 70per cent.

This is appalling.

The national insurance threshold is not the same as the personal tax allowance. So the NI payments kick in a little earlier.

For a personal finance editor not to know this really is terrible.

But there\’s more of course! This is hardly news either, these high marginal tax and benefit withdrawal rates. Recent budgets have all included a table of how many people face such rates: not just 70%, but 80 and 90% as well.

You really would (or perhaps should) expect a reporter on a beat to know such basic things about their beat.

Especially since he\’s using an example of pensioners…who don\’t pay NI.

Grr, Grr, Grrr

Look, yes, comparative advantage is one of those things that\’s really hard to grasp. It is counter intuitive.

But, but, et tu Dave?

This (lovely and interesting) map isn\’t showing comparative advantage. It\’s showing absolute advantage.

A country which is \”best\” at something has an absolute advantage. Comparative advantage is about that we do (whether country or individual) the thing which we are least bad at given our range of possibilities.

The whole point is that even if Iran is the best at producing pistachios, then even though they are better than us at producing pistachios, if the thing that we do best of the things it\’s even possible that we can do is produce pistachios then pistachios we should produce. Yes, even though Iran is better at it than we are.

Grr, Grr, Grrr…..

Does not compute

This is an odd thing for an economist to say:

If houses could be bought relatively cheaply, it was because local councils once provided \”social housing\”. Council houses were sold off by Margaret Thatcher – leaving housing entirely to the market,

Flogging off council houses increases the supply of houses that can be purchased. Other things being equal (which of course they weren\’t, I\’m looking at this one single point) that would make houses to buy cheaper, not more expensive.

Then again, Irvin is an \”economist\” at SOAS and they do things differently there.

How to be a NIMBY

A CLOSE-knit community has clubbed together to pay £122,500 to keep a favourite beauty spot out of the hands of housing developers.

Fourteen residents joined forces to buy a 13-acre field at auction because they feared it would otherwise be built over.

Don\’t want land developed or built upon?

Get your chequebook out and buy it yourself.

My parents and their neighbours did the same when a local corner of a green and pleasant Bath came up for sale.

You want it, you pay for it, don\’t bend the law or insist upon the power of the State to do it for you.

Well, yes, quite

A number of points I\’ve made myself over time.

If you have to ration then rationing by price is the best way to do so….and if there are those too poor to afford the good or service and you wish to make sure that no one is too poor to afford the good or service then give them money so they can afford it.

We do this with food: give people money to buy it rather than insist the supermarket have a special set of prices for the poor or indigent. We ought to be doing similarly with university, gametes, dentistry and health care in general.

Vastly better to have an operating market and adjust incomes to compensate than to try and not have the market in the first place.

The key point in that IFS report

Low-income households of working age lose the most from the June 2010 Budget reforms because of the cuts to welfare spending. Those who lose the least are households of working age without children in the upper half of the income distribution. This is because they do not lose out from cuts in welfare spending and are the biggest beneficiaries from the increase in the income tax personal allowance.

Now. Umm, I\’m really rather shocked that anyone is surprised at this.

Two basic decisions have been made. One, that we need to trim (at least!) the welfare state. Partly this is to do with not having a great deal of money around and partly so that work actually pays: when there is no point, financially, in going to work then more people won\’t go to work.

Now, we can argue about whether that\’s a good idea or not but given that this is what the current government has decided, the thought that this will hit poor families of working age the most shouldn\’t be surprising. For it is, of course, poor families of working age who are the recipients of the largess (pittance, to taste) that the welfare state distributes.

Welfare cuts will, of course, be bourne by those who receive welfare.

Second, the decision has been taken that tax rates are too high. Again, we can differ over this but there\’s an entirely reasonable case to be made that current levels of taxation (imposed upon our really, compared to the Nordics, rather bureaucratic and meddling economy) are harming long term growth prospects. If we had the classically liberal economies of the Nordics we might be able to get away with the high taxes and redistribution. Or if we kept the bureaucracy then we can\’t have them perhaps.

But that decision having been made it\’s really not all that much of a surprise, or at least it shouldn\’t be, that the gains from lower taxation go to those who currently pay the most in taxation: higher income families.

And when you put the two together, given that higher income families with no children don\’t get those universal subsidies for children, it really shouldn\’t come as a surprise to anyone at all that the beneficiaries of lower tax and lower welfare payments are higher income families without children and the losers are lower income families with children.

What did anyone think would happen? That tax cuts would aid those who don\’t pay tax and that welfare cuts would harm those who don\’t get welfare?

As to what Osborne said about it all: he is a politician and his lips were moving. \’Nuff said.

What an amazing surprise!

The Future of Rural Energy England (FREE) – a new energy efficiency scheme funded by energy company Calor – has matched fuel poverty data with areas of England that are off mains gas, showing Forest Heath in Suffolk, Berwick-upon-Tweed in Northumberland, and Bassetlaw in Nottinghamshire contain the highest proportion of fuel-poor households in off-mains gas England.

Places off the mains gas network pay more for energy than places on the mains gas network.

Tomorrow, proof that those using AA batteries pay more to keep the lights on than those connected to the National Grid.

The real beauty of the study is that it\’s funded by the company which provides the expensive gas to those not on the gas grid.

There\’s no particular surprise here

Britain\’s leading independent tax experts today flatly rejected the coalition government\’s claims to have shielded poor families from five years of austerity when they described George Osborne\’s emergency budget as \”clearly regressive\”.

In a direct challenge to Treasury claims that the package of spending cuts and tax increases announced in June was fair, the Institute for Fiscal Studies (IFS) said welfare cuts meant working families on the lowest incomes – particularly those with children – were the biggest losers.

I\’m really not sure why this is even being argued about.

The great gusher of money that Labour sprayed around the place went largely to pensioners and low income families with children. In reversing that gusher (for the clear and obvious reason that we cannot afford it) it will, obviously enough, be pensioners and low income families with children that lose out from the current arrangements.

I don\’t really see any problem with that logic.

Now, of course, you can go on to say that pensioners and low income families with children shouldn\’t lose out but that in itself would be to accept the New Labour settlement as being settled. That the size of the State, the size and amount of redistribution that was enacted over the past 13 years should now be set in stone and stay forever.

Something which is, as you might note, not something which the Coalition actually accepts as a premise.

Another way of putting this. New Labour tried a particular move towards a more redistributive tax and benefits system. Some groups gained from this. The new government thinks that that particular move wasn\’t a good idea. They are thus reversing it: therefore, of course those who gained initially are now going to lose out as the reversal takes place.

No Parliament may bind its successor remember and we do seem to have voted in a government which doesn\’t accept the ratchet to a more social democratic permanent state.

So, err, OK, the poor and the old are going to lose what they gained under the last government. And?

This is a very low number indeed

Around one in five large British businesses has considered relocating abroad for tax reasons, a report commissioned by HM Revenue & Customs found.

In the same way that the generals have a written plan for war against absolutely everyone stuffed away in a filing cabinet somewhere, I\’d expect every business to have at least looked at the costs/benefits of redomiciling.

Given the ease with which it can be done I\’d even think that they\’d be close to being in breach of their fiduciary duty if they don\’t at least consider it from time to time.

Then again, never understimate the power of inertia.

Presented without comment

SIR – Those with experience of the old Stock Exchange floor will readily recall some of the nicknames (Letters, August 22) bestowed upon its habitués.
Among them were two brothers, both with highly distinguished military careers and both winners of the Military Cross, one with bar and one without.
The latter acquired the sobriquet of “The Coward”.

I know, I\’m sorry,

Two in a day on Ritchie.

Discussing the normal distribution:

Yes, that’s the normal distribution – a widely recognised statistical phenomenon. As Wikipedia says of this diagram:

Dark blue is less than one standard deviation from the mean. For the normal distribution, this accounts for about 68% of the set (dark blue), while two standard deviations from the mean (medium and dark blue) account for about 95%, and three standard deviations (light, medium, and dark blue) account for about 99.7%.

What this says is that if you observe a phenomena (almost any phenomena) most results cluster around something that might be called normality. But there will always be so data which is way out of the normal range.

Now I don’t ignore stuff way outside the normal – Black Swan theory teaches the importance of that – but equally, and quite candidly, the vast majority of the time we can identify the outliers in any population (like toll roads and Catalonian anarchists) and say they are absolutely irrelevant to the formulation of policy that is likely to have any consequence for real people right now living their lives in the normal range of expectation. Or to put it another way – we can safely ignore this stuff.

So we can safely ignore the stuff that\’s two more more standard devations from the normal can we?

Good Oh. So what the top 2.5% of society earns or how they are taxed is something we can safely forget about then.

Good, glad we\’ve got that sorted.