Brexit and function of a border

I found this very helpful from the excellent Martin Sandbu on thinking about the Brexit negotiations.

[Too] many UK politicians still don’t seem to know what function an economic border has. So let’s break it down. When goods cross an international border, three things have to be enforced. First, the collection of any import duties or compliance with import quotas. Second, compliance with rules of origin, which involve preventing third-country goods from being camouflaged as the trading partners’ own production (when the latter are treated more leniently). Third, the enforcement of standards, such as food regulations, which must be met for the products to be legal in the territory they enter.

This is helpful. The point is that only the single market can deliver frictionless trade, not the alternatives e.g. a free trade area, or customs union:

An FTA takes care of the first by removing tariffs between the trading partners. A customs union takes care of the second by agreeing on the same tariffs against third-party countries (so that no rules of origin need to be checked once the goods are inside the customs union). A regulatory union takes care of the third: when the rules are the same in both countries, compliance checks when goods cross a border are unnecessary. The UK policy at the moment is to negotiate an FTA but leave both the EU customs union and the regulatory union known as the single market. But you can eliminate the need for an economic border, with checks, only if you have all three. And that presupposes a visa- and passport-free travel area, without which the people crossing the border would need to be checked as well.

Third, this means it is an error to think the Norway-Sweden border or the Switzerland-EU allows frictionless trade. Norway is in a free-trade agreement and a regulatory union with the EU (through the European Economic Area, which is both). But it is not in the customs union, so rules of origin compliance must be checked. And for this a physical border infrastructure is necessary. Switzerland is not in the EEA but in effect harmonises its regulations with the EU’s and is therefore in a comparable situation. (Norway and Switzerland are in the Schengen area of passport-free travel.)

Fourth, for good measure, let us add that promising customs and regulatory harmonisation in only some sectors won’t do: border checks would then be necessary to determine if the transported goods fell under the covered sector or not. That’s why if the UK will allow Northern Ireland some regulatory and customs alignment with the EU, it may as well permit it align across the board.

Does more hours mean less productivity?

The ONS is really motoring on its productivity releases.  Here's one from April 2017 (home page).

1. the upper panel shows before the Great Recesion many countries lay in a corridor where hours growth was quite compatable with productivity growth.

2. the lower panel shows that after the GR this seems to have broken down: that the same hours growth is associated with much less productivity growth. That in turn suggests a big fall in TFP growth, and the lastest TFP growth is set out by Bart van Ark and Kirsten Jäger in: 
Recent Trends in Europe's Output and Productivity Growth Performance at the Sector Level, 2002-2015.

Various teaching links

1. Opponents of capitalism tell you that the market system promotes greed. selfishness and rapacious behaviour by firms.  Proponents say no: its the opposite as firms have to understand what consumers want. A view from Tim Harford's great book Fifty Things that Made the Modern Economy" http://amzn.eu/aWaeGcn. about the founder of Selfridges, Mr. Selfridge

"He saw that female customers offered profitable opportunities that other retailers were bungling, and made a point of trying to understand what they wanted. One of his quietly revolutionary moves: Selfridge’s featured a ladies’ lavatory. Strange as it may sound to modern ears, this was a facility London’s shopkeepers had hitherto neglected to provide. Selfridge saw, as other men apparently had not, that women might want to stay in town all day, without having to use an insalubrious public convenience or retreat to a respectable hotel for tea whenever they wanted to relieve themselves. "

File as well under innovation.

2.  Via Tim Taylor, this is a very good review:§ "Immigrants, Productivity, and Labor Markets," by Giovanni Peri

3.  Do our banks still need fixing? yes they very much do says Martin Sandbu. 

 Some points

"

A rather worrying consensus emerged in a recent conference held by the Centre for Economic Policy Research, in which top names from the economics profession (their presentation materials are available on the conference web page) assessed the state of the financial system 10 years after the crisis.

The consensus was that we still fall far short from what would be a safe financial system."

For as John Vickers pointed out, “the general . . . opinion among economists outside the financial sector is that banks should be required to have at least twice as much equity capital . . . as the prevailing regulatory settlement”, but “regulators, not just banks, [think] that reform since 2008 has got us to about the right place”.

Martin Wolf sums up the economists’ consensus in a recent op-ed, where he advocates equity requirements four to five times higher than today’s rules.

..... Vickers has strongly criticised the Bank of England for its judgment that the required push for more equity funding in banks is largely completed. (To be fair, the BoE is also adding requirements for non-equity funding that can be “bailed in” to bear losses in a crisis.) Across the Atlantic, the US Treasury has plans under way to weaken rather than strengthen capital requirements — plans that, in William Cline’s analysis, could cost the US economy $2.7tn in increased risks over 10 years

 Vickers and Tucker are critical of equity measures (something for intangible reserachers to bear in mind) 

Second, the way it [equity] is constructed means the inherent instability of measured bank equity is unstable in just the wrong way. Paul Tucker, the former BoE deputy governor, has explained this in a rather chilling, if technical, speech. Before the crisis, he says, “‘common equity’ was measured without adjustments for items recorded by accountants as assets but which don’t — can’t — help in a crisis”, such as “goodwill” (the assumed extra value acquired when assets are taken over for more than their prior accounting value) or future tax credits.

That means improvements in regulations made to sound impressive — Vickers highlights BoE governor Mark Carney’s point that equity requirements are 10 times higher than before the crisis — are true only because of how absurdly low the requirements were then.

Here's a key calculation: 

In Tucker’s calculation, “when tangible common equity is measured in a way that is more fit for purpose, the minimum risk-asset ratio requirement was about 1 per cent” and even less when not discounting supposedly safe assets with low risk-weights (which has its own problems). Consequently, the ability of banks today to have assets 25-30 times as large as the equity intended to absorb losses on them is only 10 times stricter than before the crisis because they could then get away with gearing up their own (their shareholders’) money by three-digit multiples. Vickers is surely right that “10 times better than hopelessly lax is not a useful measure”.

 4. Related, here is Catherine Mann on how the wrong type of lending distorts growth.
Catherine L. Mann (OECD) Slides