Author Archives: Jack Gannaway

Gold vs Bitcoin

A wet Sunday afternoon has let to the exploration of my Netflix ‘to watch’ list, which is normally compiled by clicking through ‘more like this’ for about 20 minutes before I go to bed. Today this led me to alight on End of the Road: How Money Became Worthless.

It’s been a while since I dug around the dark conspiracy-filled underbelly of the internet so I was not immediately looking for signs of film that had been produced by a team that all have a room in their basement lined with guns and cans of beans.

However, after a while all the pieces start to come together and by the end I was half expecting someone to accuse all the world’s ills of being caused by Jews and the Illuminati. Although it is littered with comments which can quite easily be rebutted by appeal to logic, solid evidence or at the very least well-established conventional economics, there are some things said which I think worth responding to, in particular in the context of the current debate going on about Bitcoin and whether it is a currency that should be taken seriously.

The gist of the film is that currency backed by gold is the natural order of things and that the “experiment” that the world has been part of since the abandonment of the gold standard in 1971 is going to come crashing down, due to all the horrendous fiscal crimes which fiat money allows governments to commit. Put slightly less alarmistly: a currency which is backed by gold means that the amount of money in circulation is determined by the value of gold, and this is something which is relatively stable over time – gold has always been valuable and trusted as a store of wealth. Therefore governments were not able to print money unilaterally without very obviously risking credibility .

However, when the US ceased allowing dollars to be converted to gold in 1971, the countries involved in the first Bretton Woods system of international financial exchange moved to a fiat currency system where their own currencies were backed by reserves of dollars, rather than gold. The film alleges that the value of the dollar in this system is held up by a giant ponzi scheme comprised of the US government, the international banking system and “the media”. This ponzi scheme results in enormous national debt which is used to fuel the economy, and then is financed by printing money.

There are umpteen other tinfoil hat arguments made, but the response to the question “is it preferable to have a currency backed by gold” highlights some issues about bitcoin.

What is a currency for? The purpose of a currency is to facilitate exchange, i.e. for me to transfer value to a you in exchange for something you are giving me. A good currency is one where you can then take what I have given you and use it to buy something from someone else. (This is why currency is generally superior to bartering – relying on someone simultaneously offering what I want and wishing to accept what I will give for it is very, very difficult). It’s also helpful if the currency is easy to move around and can be subdivided into small enough units to pay for sundry items. The bottom line is that currency is a measure of value and key for success is that it is trusted by all parties.

How can a currency be improved by having a fixed exchange rate with gold? If you are suspicious of a currency: you don’t trust other people not to tinker with it, including the government, then you might want to have assurance that the money you are given for selling a product can be converted into something that you do trust, like gold. If you live in a world where your government is debasing the coinage, then demanding convertibility to gold is a rational response! However, this sort of activity ultimately leads to instability and a government that wants to stay in power (as opposed to a divine monarch) has an incentive to maintain a stable currency.

So a backing with gold is one way of making a currency trusted, but clearly not the only way. Furthermore, the value of gold is only derived from the fact that its supply is constrained and that humans like shiny things, and have liked them for a long time. Other natural substances that are in similarly short supply (semi-precious gems, amber, meteorites) do not hold the same mystical value as gold. It has been demonstrated that people are happy to use anything as currency as long as other people will accept it and the value it represents doesn’t change unpredictably.

Which brings me on to bitcoin. To date there has been some debate over whether bitcoin will ever be recognised as medium of exchange with the same level of acceptance as any national fiat currency. The strength of feeling on both sides of the argument has led some to stake a pair of alpaca socks on the outcome.

Bitcoin is gradually moving towards two of the criteria for being an effective currency:

after you have dedicated a gigabyte of your home computer’s hard drive to the background data, you are away (it’s mostly portable)
the current bitcoin system allows it to be subdivided into one ten-millionth, i.e. 0.00000001 bitcoins. At the time of writing this means that the smallest unit a single bitcoin can be divided into is equal to about 0.5c (1btc = 494usd)

Therefore the only quality that bitcoin lacks is general acceptance and trust. The dramatic changes in its dollar value over the last two years, partly fueled by speculation, have not helped this. The graph below illustrates the extent of this continued variation. (apologies for some of the sins of this graph – I’m still getting my head around Excel 2013 and was too lazy to boot up Stata).

bitcoin value

N.B. it should say week-on-week change

Therefore, I would probably side with the pessimistic side of the bet.

The Curve, by Nicholas Lovell

Wandering around the Whitechapel library last week I was attracted to the vibrant red cover of this book, along with the fact it had a blurb by David Rowan, the editor of Wired UK. The slightly less vibrant content of the book is a hubristically contrived framework for thinking about how to successfully market goods and services in a world where so much is increasingly available for free. The “curve” in question is the demand curve, that helpful tool from first year undergrad economics courses which illustrates how the quantity of a good that is demanded changes as the price changes. For most people, if the price of something falls they are more likely to buy it.

Mr. Lovell’s point is that most firms face a demand curve where there is a small volume of people who are willing to pay a lot of money for their stuff, and a large volume who are not willing to pay very much. The globalisation of competition means that in many cases the price of things has fallen to the cost of production. Firms therefore have to use new methods in order to either a) identify those people who are willing to pay more b) move people up the curve or c) use the sale of zero-profit goods to drive sales of higher margin goods.

He comments on various business models that have either emerged in response to technological disruption, or have seen new or more widespread use, for example, freemium in the case of music distribution and different use of platforms/two-sided markets by Apple with its App Store and Amazon with its Kindle.

However, it’s really just a number of extended magazine articles which don’t hang together. There isn’t a cohesive story, other than that technology is disruptive. I don’t need to read any book to teach me that lesson, hence why I’ve only skimmed through about 20% of this one! (For a lesson in how to write a compelling book on changes in global trade and marketing, read Thomas Friedman’s The World Is Flat.)

If you’ve been living in a cave for the past 15 years and haven’t read anything in the business, technology or popular press about how “times they are a changing”, then this is definitely worth your time. Otherwise, give it a miss.

Easy answer…to an easy question

I previous posts I have mentioned that I was going to try and look at forecasting the volume of treatments of admitted patients carried out in English hospitals. The graphs below show first the national volume of treatments, across all hospitals. (FCE stands for finished consultant episode, the unit treatments are counted in). The second graph shows a zoom in of the results of the forecasting methods. If you are wondering, yes methods 3 and 5 have produced almost exactly the same result.

It would seem from this graph that method 2 is the most accurate. Method 1 was never going to be any good: it was really just me checking I was using Stata correctly to create the new forecast data. Methods x-y are all based on econometric estimators. Although they appear to all present the same results at a national level, at the level of individual hospitals their accuracy does vary slightly.

The statistics used for more accurately measuring the forecasts at the level of each hospital (which is what I care about) are based on the average difference between the forecast value and the actual value. Expressed as a percentage the econometric methods had an average error of between 0.5% and 0.7%. This is not not too shabby.

Method 2, which says the growth rate will be the same as in the last year observed proves to be the most accurate at the level of individual hospitals, with a mean error of 0.01%: the most successful by a long way!

The reason why this task an “easy question” is because while the data are complicated – many observations across multiple hospitals – forecasting two data points when the data do not vary a great deal from year to year means that any reasonable method is never going to be significantly wrong. What I might do next is look at some hospitals in more detail, possibly those with the worst forecast, and see if there is anything they have in common.

It would also be interesting to try forecasting over a longer period of time. Another option is to download the monthly version of this activity data and use that, which would mean twelve times more detail! I could also use Monte Carlo simulation (doing the forecast lots of times) to get a distribution of results, rather than just a single point estimate for each year.

Dipping a toe in the water

Before reading this, it is worth skimming my previous post on the topic of forecasting English hospital admissions.

The two graphs above show the results of my initial pokings into the NHS hospital activity data. The first one shows quite clearly how activity has in average increased every year. (I’m not yet quite sure why it isn’t showing any data for years 0 and 1. By rights it shouldn’t show 0, but 1…)

The second shows that while almost all trusts have positive mean growth over the period, there is a large minority which have only experienced very modest positive growth, much less than the national means in the first graph would imply.

While mildly interesting on its own, this has implications for the inferential analysis which is going to follow. One of the key issues in performing econometric analysis with panel data is how you treat your units, in this case hospital trusts. Under one approach, you assume that that each unit has its own unique effect on the variable you are analysing, but that these effects are random. The second approach says that they are not random but driven by some systematic differences in the units.

Based on intuition one would have thought that the random approach would not be appropriate for hospital trusts because the growth in activity is going to largely be driven by their local population and the the funding levels of their local Strategic Health Authority, i.e. there are systematic differences. The second graph doesn’t really help us decide which approach is more appropriate because it shows the trusts as being quite neatly distributed, even if the mean is skewed by some outliers.

This means that we will have to use statistical tests to decide which approach is better, and possibly just see which makes the better forecast.

I can’t get no … devolution!

The West Lothian question has survived since 1977 without a satisfactory answer. Gradual devolution to the citizens of Scotland has been piecemeal and only focused on the dispensing of public funds; the Scottish Executive has authority over education, healthcare and justice policy, but almost no responsibility for raising revenue to fund them. This has clearly led to an unsatisfactory situation where Scottish politicians spend most of their time talking about how money should be spent and how more funds can be extracted from Westminster, rather than the trade-offs and compromises which are what public policy decisions are actually about.

In their manifesto for Scottish independence, the Scottish National Party make all sorts of dodgy assertions about how Scotland is fabulously wealthy and independence will make it even more wealthy. The economic arguments are quite convincingly demolished by the Institute for Fiscal Studies. Even if you’re not won over by high quality fiscal analysis (a small minority, surely?) then you should be persuaded against Scottish independence by the presence of Alistair Darling – possibly the most sensible senior politician alive in the UK.

This is all very well-worn stuff. However, a point which I hadn’t considered is the one made by the playwright, David Grieg, in the Guardian – independence in Scotland could lead to greater political and fiscal independence for cities and regions in England.

This is a very good point.

As a resident of England, I don’t really care if the Scots decide to break away from the rest of the UK as it probably won’t affect me personally very much, aside from having fewer decisions taken in Parliament by Scottish Labour MPs. I do however care very much about diluting the power of Westminster by increasing the degree of federalism in the UK. After living in London for six years I’ve noticed the extent to which residents of London benefit disproportionately from the economic largesse of the capital, and this is aside from the unearned windfall they get from house price rises.

The inability of the rest of the UK to manage many of its own affairs means that public money is spent on ridiculous vanity projects like the Millenium Dome, the Olympics, Crossrail and HS2. It also means that many public institutions, both political and cultural, choose to locate in London for reasons of convenience and access to London’s labour market.

All of this is self perpetuating – people like me choose to live in London because we can earn more. We then stay here because a) there’s quite a lot of cool stuff to do, b) even once you’ve got experience, in many industries it is difficult to find employment outside of London that maintains your standard of living and c) all our friends are here because they are in the same situation! Employers and institutions are on the same conveyor belt.

The growth of the rest of the country is not something that is going to happen on its own. It may not look like much of big deal now, but in twenty year’s time, the movement of much of the BBC’s activities to Manchester will have had a big impact, hopefully moving some of the media wealth of west London to Salford. It is this type of big decision that will push influence and wealth out from the south east, and organisations are going to be more confident about making those decisions if there are powerful local governments to look after their interests.

And this is why we need to wind down Westminster. Until the rest of England gets more devolution, and crucially, responsibility for raising revenue, resources and attention will continue to be poured in to London and the south east. While the Scots are being asked if they want independence, the regions and cities of England should be given it. When you haven’t had power for a thousand years it’s going to take a while to get used to the idea.

The Case for Land Value Tax

I am currently going through the rigmarole of buying a house. The searching process has made me reflect on the distortions in the UK property market and how this is actually symptomatic of a deeper issue with the tax system. We have been looking for houses in east London and have been struggling to find anywhere that we can afford and is also large enough for us and the early stages of a future family. The issue is not the ongoing cost of the mortgage payments but the costs of the deposit and stamp duty which the Help to Buy scheme are supposed to help with.

This problem is caused by high and ever-rising house prices. Why are houses so expensive in the UK? The main issue in London is constrained supply. While there are an increasing number of new houses and flats being built, from my personal experience they are generally aimed at the top of the market. They are also very small: in 2011 RIBA reported that new homes in the UK are the smallest in Europe. Planning limitations also mean that it is difficult to build new tall buildings. When they are allowed they are usually “luxury”. There is also a strange cultural attachment to low-rise living. The British seem to want to live in a village even if they are in the middle of a city.

There are also significant transaction costs to buying and selling a house. For the seller there are the costs of estate agents and for the buyer there is the cost of stamp duty and their mortgage deposit if it is their first property.

All these factors pile in together to result in a system where not enough houses are being built, not enough houses are sold and land is not being used in the way that is best for society.

For the UK, and mainly in the south east and London, people can’t afford to live near where they work and add value. The distortionary effect of taxing income above all other things is that it disincentivises desirable activity (work). The lack of tax on property incentivises under-use of it: hence large mansions in central London which are un-occupied for most of the year. People outside of the south east are penalised: someone earning £30,000 and living in Newcastle is contributing just as much to the economy as someone living in London earning the same. However the person living in London, living in a more expensive house is occupying more of the country’s land resources. They receive an unearned benefit from the rise in the value of their house just because of its location, not because they are adding more value to the country.

One could argue this could be resolved by levying capital gains tax on the sale of all property, rather than exempting the main residence. However this would make the problem worse because it would increase the transaction costs of moving. The solution is something which is a levy on the thing which is the source of the unearned income – the occupation of land.

The basic structure of a land value tax is that the owner of a parcel of land pays a regular fee based on the market value of the land. There are clearly some issues with how the land would be valued – how would it be kept up to date if the land hadn’t been sold? – but there are many reasonable options, such as creating ward-level indices so that even if land has not been sold recently, its value is scaled up from its last sale according to more recent sales of land and buildings.

There are some issues with a land tax – it would strongly incentivise the high wealth/low income population to move to smaller/less valuable property. While this effect is economically desirable because it frees up prime locations for those who are working to live near their work, it also has some deleterious social effects. In most cases the freehold-owning retired would have to move out of inner city properties because their incomes would not be high enough to pay the land tax. This could clearly have very negative effects both personally on those forced to move as they are removed from their social and support networks, but potentially also on the communities they leave behind. It could also result in the countryside being largely populated by the retired.

These negative impacts could be mitigated with a staggered introduction of the levy, or scaling it differently for those over state pension age. While it is clearly in the public interest to have the most efficient use of land, there is a certain amount of injustice in forcing those who are currently retired to immediately compensate the younger generations for the distorted economy we have been blessed with.

The Land Tax has been discussed elsewhere (Financial Times, LandValueTax.org, LabourList). However, in the current pro-oldie climate no politician will touch it with a barge pole. The only way to out more high-profile supporters (such as the semi-closeted Vince Cable) is to get more young people talking about it. It is being presented in some quarters as another “tax the 1%” proposals. However this would probably have very little impact on anything other than political parties’ poll ratings. The only way for a land value tax to have any impact would be for it to replace a less desirable tax, such as income tax.

In the near future I will post the results of some analysis to look at how you could structure a land tax so that it could replace income tax.

NHS Hospital Activity – Looking Under The Hood

So today I started a little project to look in to how the amount activity performed by NHS providers changes over time. The focus is going to be on the aggregate amount of activity performed by each individual provider. There are potentially a number of stories in these data but the most interesting is whether it is possible to forecast the amount of activity for the next year.

Today I have started building my dataset from the annual activity datasets published by the Health and Social Care Information Centre (HSCIC). I was hoping that the collection of the data into a pleasing balanced panel would be smooth going. How wrong I was.

Firstly, one would have thought that in this age of Data.gov.uk one of the largest holders of publicly accessible data in the UK would have a sophisticated system for storing and searching through their data. The huge value of the data that has been fully uploaded to Data.gov.uk is that it is very easy to find different years etc. of the same data, or different categories. Like the Office for National Statistics, the HSCIC has chosen to take its time in systematising the storage of its data. It is possible to search for the Hospital Episode Statistics on Data.gov.uk, but you will not find any spreadsheets, let alone tidy csv files. All you will find is links to HSCIC pages. Welcome to the 90s!

Once you’ve resigned yourself to trawling through the HSCIC pages you will encounter multiple frustrations with corralling together time-series data: each year’s publication has it’s own page with inconsistent titling so they don’t all come up together in a search; the spreadsheet for each year’s data has a different structure so you can’t pull it out with a script and the same variables have different names in different years. It’s almost like someone is intentionally trying to make it hard to do anything with this data…

For anyone reading this with knowledge of these things, I have only been working on data for Admitted Patient Care (APC). The other big category of hospital activity is Outpatient Procedures (OpProc). The major difference for these purposes is that the activity measured is different. For APC, the metric is Finished Consultant Episodes, whereas in OpProc measures procedures. For any sort of inferential model of hospital activity it will be necessary to look at both because for some conditions a patient can be admitted or treated as an outpatient.

More to follow as I stick my head further under the hood!