Wednesday, 28 September 2011

Immigration: what are these people thinking?

Am I the only one unnerved by the outbreak of anti-immigration feeling on the left at the moment? Such views the right might be expected, but from the left? Here in the UK, Labour politicians, yes, that's Labour politicians, are falling over themselves to blame the immigrants for everything (reminding me of the way Conservatives used to blame feckless single mothers). The London Times writer David Aaronovitch links approvingly to a very good piece by Jonathan Portes on why the facts don't support Labour (Labour are apologising for immigration record. They are wrong to do so. > Excellent article).  But all this is as nothing in comparison to the extraordinary plan from Democrat Presidential Candidate Micheal Dukakis in the New York Times (which I saw tweeted yesterday HT, Alex Tabarrok).  The cunning wheeze is this:
  1. Immigrants only do the worst jobs
  2. So if you can get rid of the worst jobs then immigrants won't come
  3. Plan: raise the minimum wage, which makes the worst jobs disappear, so achieving 2. 

And this is a plan from the liberal left?  In a country built on immigration? 

Thursday, 22 September 2011

Innovation: A Guide for the Perplexed

This is a non-technical draft on the Economics approach to innovation.  Literally just off the processor, so may have some typos and not settled yet.  Comments welcome.

Wednesday, 21 September 2011

How much do UK Universities contribute to UK Economic Growth?

My attempt to answer this question.

Universities undertake two major tasks: teaching and research (the third being the
administration required to manage these processes). There are then at least two
possible mechanisms whereby these tasks affect economic growth.
a. Teaching. More skilled students raises the human capital of the workforce
and so growth.
b. Research. New knowledge spills over to other sectors, raises their
knowledge capital and so leads to new products, services, methods of
production etc.
This note attempts to quantify these effects.

Counter-cyclical regulatory policy

Mike Mandel blogs: Hamilton Advocates Countercyclical Regulatory Policy.  Might this be an emergency strategy given the mess we are in?

Legislate or innovate?

At 9 am in a seminar today David Kester, CEO of the UK Design Council, appeared holding a beer glass.  I was somewhat surprised by this, but he used it to make an interesting point.   It turns out that there are, in the UK, 87,000 violent incidents involving fights with glass each year, many of them in pubs.  So rather than ban them, there was a contest to design glasses that did not shatter.  And indeed the designs did it, using some form of resin holding the glass together.  Interesting to see  a market solution to what seems like a regulation problem.  More is here. 

Tuesday, 13 September 2011

Student reading notes on the Vickers report

Here’s how to read the report for non-specialists.  The report is here:

  1. First look at Para 4.6ff, in particular Box 4.1  that shows the basic model of banking and how a shock is so devastating to highly levered companies.   (The shock question is related to just what banks do: see Para 4.21 below in  a moment).
  2. Paras 4.10ff then tell you why highly levered banks are bailed out by taxpayers.   Para 4.10 talks about the key argument that economists call “externalities”.   That motivates a subsidy, but creates moral hazard. The rest of the paras up to 4.20 talk about this.
  3. Para 4.21 makes an important point.  The fundamental point of banks is maturity transformation. That is, borrowing short and lending long.  That makes them uniquely vulnerable to confidence problems, which is why a guarantee is a very good idea: a solvent bank can go bankrupt, unlike a solvent company. 
  4. Para 4.23ff are then more practical discussion, and are rather more technical.  So I would then skip back to
  5. ..chapter 2, which is an overview of financial stability. 
a.       Note the vital feature of 2.7, namely that separation is not just about preventing bankruptcy, which cannot be done, but about making it more orderly (with high capital requirements to try to stave off the position to start with).
b.      Note as well the very useful box 2.1 on page 3.1 about how Northern Rock etc. would have been different with these recommendations.
6.       Finally, I would now read the executive summary, pages 7 to 18, to bring it all together.

Some final notes on FAQs on the crisis that the report addresses:
a.       The key is too big to fail problems.  Answer yes, page 14.
b.      Northern rock was a retail only bank and failed, so this will not help.  Box 2.1
c.       RBS took over ABN and that was the problem.  Answer, RBS borrowed to take over and would not be allowed to do so with more capital, Box 2.1
d.      UK banks will be at a competitive disadvantage with respect to EU banks with less tight regulation.  Answer, possibly. Para 2.21  , 2.23, 4.35.
e.      The crisis was in the shadow banking sector, which this does not address.  Answer, dealt with by other regulation, Para A2.19ff.
f.        Only full separation will solve the problem.  Answer, maybe, but there are some advantages to partial separation, Para 3.59ff.  .  Banks cannot provide data on economies of non-separation, Para 3.67.  Separate governance is important.
g.       The boundaries of a ring fence are too porous.  Answer, this will have to be regulated as in the US, see Box 3.5, page 70.
h.      The costs don’t outweigh the benefits.  No, the costs of financial crises are very high, Para 5.8.
i.         Having more bank competition is bad for financial stability.  No, box 6.1, page 159.

Monday, 12 September 2011

Vickers’ critics are missing the point

Comment in FT opinion section by Diane Coyle and me up on FT site . Builds a bit on earlier blog post today

Why Vickers is right and what the critics don't understand

The critics started early for Vickers report on the future of banking today.  At least at 6.15 on @R4today experts weighed in on how ringfencing will not work.  In particular, a commentator said that Northern Rock was a retail bank but still got into difficulties.  So, they said, separation won't work.

I think this criticism misses a very important point which is on page 9 of report.  In essence it is this: some critics think the purpose of Vickers is to stop banks going bankrupt.  It is not.  In some cases, we might actually want banks to go bankrupt.  The essence is to have a structure so that we know what to do when banks get into trouble: rescue them, make them go bankrupt, allow them to merge etc.

Vickers says this:

"structural separation should make it easier and less costly to resolve banks that get into
trouble. By ‘resolution’ is meant an orderly process to determine which activities of a failing
bank are to be continued and how. Depending on the circumstances, different solutions may
be appropriate for different activities. For example, some activities might be wound down,
some sold to other market participants, and others formed into a ‘bridge bank’ under new
management, their shareholders and creditors having been wiped out in whole and/or part.
Orderliness involves averting contagion, avoiding taxpayer liability, and ensuring the
continuous provision of necessary retail banking services – as distinct from entire banks – for
which customers have no ready alternatives. Separation would allow better-targeted policies
towards banks in difficulty, and would minimise the need for support from the taxpayer. One
of the key benefits of separation is that it would make it easier for the authorities to require
creditors of failing retail banks, failing wholesale/investment banks, or both, if necessary, to
bear losses, instead of the taxpayer."
In other words, if a future Northern Rock Utility Bank gets into trouble, regulators know that it is a retail bank and part of the banking "utility"  rather than the "casino".  So we know what to do: we might want to bail it out, or let it go under in an orderly fashion etc.  If a future Northern Rock Casino Bank gets into trouble, likewise regulators know what to do.   (In any case, with higher capital requirements we should hopefully avoid this problem to start with).

What this means is that the scope of activities across the ringfence is very important, as Goodhart has pointed out (the boundary problem).  That is going to need some canny regulators, which does seem like a very big ask (declaration: I was on the Competition Commission for eight years).

Finally, outside the detail, to me there is an even bigger point.  We now know that successive governments have been near enough in the pockets of News International.  So far, they have been near enough in the pockets of the banks too.  Implementing these reforms is the first step to changing the latter.  If the reforms are stopped then we know our democracy has been truly subverted.

I look forward to hearing Sir John on Today at 8.10.

Update.  Sir John, in my view, very authoritative on Today just now.  Humpers asked him, rightly, "you cannot legislate against recklessness" and about Northern Rock.  John replies: get incentives right (i.e. have higher capital requirements) and be in a position to deal with if bank gets into trouble (which separation helps).

Monday, 5 September 2011

Technical progress and trade

Technical progress makes a cliche out of date as the Forth Bridge Paiting comes to an end. By the way, this will no doubt cause bridge painters to lose their jobs, but I don't see any fuss. If Scottish workers had lost their jobs due to offshoring or trade would there be the same reaction?