Warren Buffett as salesman for Vanguard

September 2nd, 2014

Jack Bogle, the founder of Vanguard, has called Warren Buffett the mutual fund group’s best salesman after the billionaire investor recommended Vanguard’s funds to his wife in his will. ….

“I suggest Vanguard’s [S&P 500 index fund],” Mr Buffett wrote in March, adding that the long-term results from this policy would be superior to those attained by most investors, whether pension funds, institutions or individuals, which employ high-fee managers. ….

In an email to Mr Buffett, Mr Bogle, who created the world’s first index mutual fund in 1975, described himself as “the second-best salesman at Vanguard”, bowing only to the Berkshire Hathaway founder.

Chris Flood, “Warren Buffett: Vanguard’s best salesman“, Financial Times, 1 September 2014

This needs no comment, but see also this previous post.

a forgotten message from long ago

September 1st, 2014

20 And he lifted up his eyes on his disciples, and said, Blessed be ye poor: for yours is the kingdom of God.

21 Blessed are ye that hunger now: for ye shall be filled. Blessed are ye that weep now: for ye shall laugh.

22 Blessed are ye, when men shall hate you, and when they shall separate you from their company, and shall reproach you, and cast out your name as evil, for the Son of man’s sake.

23 Rejoice ye in that day, and leap for joy: for, behold, your reward is great in heaven: for in the like manner did their fathers unto the prophets.

24 But woe unto you that are rich! for ye have received your consolation.

25 Woe unto you that are full! for ye shall hunger. Woe unto you that laugh now! for ye shall mourn and weep.

26 Woe unto you, when all men shall speak well of you! for so did their fathers to the false prophets.

27 But I say unto you which hear, Love your enemies, do good to them which hate you,

28 Bless them that curse you, and pray for them which despitefully use you.

29 And unto him that smiteth thee on the one cheek offer also the other; and him that taketh away thy cloke forbid not to take thy coat also.

30 Give to every man that asketh of thee; and of him that taketh away thy goods ask them not again.

31 And as ye would that men should do to you, do ye also to them likewise.

32 For if ye love them which love you, what thank have ye? for sinners also love those that love them.

33 And if ye do good to them which do good to you, what thank have ye? for sinners also do even the same.

34 And if ye lend to them of whom ye hope to receive, what thank have ye? for sinners also lend to sinners, to receive as much again.

35 But love ye your enemies, and do good, and lend, hoping for nothing again; and your reward shall be great, and ye shall be the children of the Highest: for he is kind unto the unthankful and to the evil.

36 Be ye therefore merciful, as your Father also is merciful.

37 Judge not, and ye shall not be judged: condemn not, and ye shall not be condemned: forgive, and ye shall be forgiven:

38 Give, and it shall be given unto you ….

The Gospel according to Luke, Chapter 6, King James Version.

personal finance in primary and secondary schools

August 31st, 2014

England is joining the rest of the United Kingdom by adding personal finance its national curriculum. The government will require younger children to learn “the functions and uses of money, the importance of personal budgeting, money management and a range of financial products and services”. Older students will be taught ““wages, taxes, credit, debt, financial risk, more sophisticated financial products and how public money is raised and spent”.

FT columnist Jonathan Eley wonders if the targeted children are old enough to benefit.

There is … no requirement to continue with personal finance education beyond the age of 16. Yet arguably the 17- and 18-year-olds, about to enter the world of work or higher education, are the ones that most need it.

…. What’s the point of telling 14-year-olds about how mortgages work when it’ll be decades before they’re in a position to apply for one? They’ll swiftly forget it all, just like they forget the value of pi, or what an oxbow lake is. ….

It may … be why the OECD … found little correlation between the amount of school time spent on financial education and financial outcomes in later life. In a study released earlier this year (which didn’t include the UK) it considered levels of mathematical attainment to be the main driver. Asian children, generally high achievers in maths, did very well. Researchers in the US also found that teenagers there who had received financial education scored little better in tests than those who hadn’t.

Another criticism is that what goes on at home has far more influence over children’s attitudes to money than anything that happens in a classroom.

If a child lives in a household where money is carefully managed, they will pick up good habits. If they grow up in a house where there’s no budgeting or planning, money is rarely discussed and where everyone lives for instant gratification and hang the consequences, then an hour a week learning about pensions isn’t going to change anything.

Jonathan Eley, “Lessons in finance are just the beginning“, Financial Times, 30 August 2014.

Asian children, on average, not only excel in maths, they also tend to live in homes where money is carefully managed, so it is difficult to determine which of these two variables (or both) might be driving achievement in personal finance.

Isis in Syria: further questions

August 30th, 2014

The trouble with the west’s war lobbyists … is that they have repeatedly urged the US and the UK into wars, some of them long and very expensive, that they don’t win. A decade ago, victory over a barbaric regime was supposed to lead to a much nicer Iraq for all Iraqis and an afterglow of nice feelings towards the freedom-loving nations. It didn’t. So the questions for … [proponents of war] are these: What is victory over a barbaric Isis supposed to look like? How do you propose to ensure this rosy outcome? What lessons have you learnt from your previous mistakes to make you credible this time around?

Trevor Pateman, “What is victory over Isis supposed to look like?”, Financial Times, letter to the editor, 30 August 2014.

Assad and Isis in Syria

August 30th, 2014

Historian and law professor Philip Bobbitt has written a ‘must read’ column for today’s Financial Times. Mr Bobbitt argues that an alliance with Assad would help defeat the greater evil of Isis, but nonetheless fears the consequences. To me, it is not clear what course of action, if any, Mr Bobbitt would recommend. Here are key snippets from his column. Read the full column by clicking on the link below (metered pay wall).

Perhaps the most duplicated photograph in diplomatic history shows Chairman Mao Zedong smiling benignly at Henry Kissinger, his American interlocutor.  ….

Should we talk to tyrants? Of course. And we do, all the time. …. The more difficult question is: should we walk with tyrants? ….

Franklin Roosevelt is supposed to have said of Anastasio Somoza, the dictator of Nicaragua, … that the American ally against the communists “may be a son-of-a-bitch, but he’s our son-of-a-bitch”. Client states who manipulate their patrons have a long imperial history, and though there is no imperial great power today, there are plenty of clients and plenty of sons-of-bitches. ….

[T]hat ardent anti-communist Winston Churchill remarked to Jock Colville the evening before Operation Barbarossa: “If Hitler invaded Hell, I would at least make a favourable reference to the devil in the House of Commons.” ….

“The Assad government may be evil – but it is a lesser evil than Isis, and a local one,” Richard Haass has recently pointed out in these pages. ….

Unfortunately, such a tacit alliance might also serve the goals of Iran, an anti-western regime whose own clients are the Syrian government and Hizbollah. A similar point has often been made of the US-led removal of Iraq’s Saddam Hussein. ….

Our objective is not simply the defeat of Isis nor even the calling to account of the Assad regime. Our objective is a peaceful region that does not ground its world view on a hatred of the west. That objective may only be achievable if Iran is brought into the society of law-abiding states ….

We have been on this bridge before. As John Gaddis observed, “Collaboration with the Soviet Mephistopheles helped the US and Great Britain achieve victory.”

But the price was the rise of a totalitarian state that was more powerful and less fathomable, and American policy became consumed with attempts to deal with the consequences.

Philip Bobbitt, “Choose enemies carefully but be less picky about allies“, Financial Times, 30 August 2014.

Mr Bobbitt (born 1948) is author of numerous books, including Terror and Consent: the Wars for the Twenty-first Century ( Alfred A. Knopf, 2008). He is a member of a Hoover Institution task force and teaches at Columbia University and the University of Texas. If you suspect that Bobbitt is a fan of Machiavelli, you may be right. Bobbit’s latest book is Garments of Court and Palace: Machiavelli and the World That He Made (Atlantic Monthly Press, 2013). Would Machiavelli treat Assad as an enemy or as an ally? It is not clear. This helps me understand why President Obama admits to having “no strategy” for solving this intractable problem.

free schools (friskola) in Sweden

August 28th, 2014

Six years ago, while updating an essay on education published in Economic Affairs (December 2004), I reviewed a radical reform begun by Sweden in 1992. Sweden’s embrace of free choice and competition impressed me. Here are highlights from pp. 14 and 15 of the 2008 update.

Prior to 1992, Sweden’s school system allowed for little choice. Government assigned pupils to their closest school, and parents had little to say in the matter, short of moving to a different neighbourhood. Very few private schools existed; most were faith-based and accounted for less than one percent of students in compulsory schooling, which in Sweden is nine years starting at age 7.

In 1992 everything changed. Anyone can now open a school, and municipalities are required to finance it on the same per-pupil terms as a government school. ….

There are no restrictions on ownership of private schools. Schools can be and are run by religious groups (Christian, Jewish, Muslim), teachers’ co-operatives, parents’ co-operatives or for-profit corporations. If a registered school attracts and retains students, it receives funding from the students’ respective municipalities. Sweden has created a market for schooling, but it is a very egalitarian market because there is no price competition and each consumer has the same access to schools. Precisely because Sweden does not allow private schools to charge fees or select students, its system has attracted criticism from libertarian groups …..

By no means all Swedish parents have deserted government schools, but the private share of enrolment has increased, and came to exceed 10 percent in 2008. Surprisingly few of the new private schools are faith-based, but many are run for profit, some as chains of schools. ….

Three econometric studies [2003, 2005, 2007] have examined the effect of introduction of school choice on the quality of education in Sweden …. All three studies exploit the fact that private schooling varies by municipality, and all find that everyone gains from competition—pupils who remain in government schools as well as those who choose a private option. The reason this happens is that government schools, faced with competition from private schools, must improve their performance or lose pupils and funding.

Larry Willmore, “Basic education as a human right redux“, MPRA Paper 40478, 28 July 2008.

The private share of enrolment has reached 20% – double the proportion of students enrolled in 2008. Nonetheless, writes FT journalist Helen Warrell, many Swedes are questioning the merits of their schooling reform.

Two decades on from the audacious experiment in opening up state education to the market, a fifth of pupils, or about 312,000 children, attend [independently run free schools, known as] friskola. Of these, two-thirds go to institutions run by companies rather than co-operatives or charities ….

No other European country has entrusted so much of its children’s education to private companies. ….
Swedish schools
But as friskola have proliferated, Sweden’s confidence in for-profit schools has been shaken. Traditionally top of the class in education, Sweden has tumbled in international test rankings, with the OECD’s most recent Pisa results showing scores falling dramatically in reading, maths and science to a position well below the average for developed nations. …. [Pisa is the Programme for International Student Assessment that the OECD administers to fifteen-year old students every three years.]

One of … [the for-profit schools], Rytmus, specialises in music and has a cult following among Swedish teenagers. Lars Ljungman, its headmaster, spent 20 years teaching in the public sector before taking over the free school two years ago.

“I was curious to find out what it would be like because within the public schools it was always said that [the education companies] were so greedy, that they didn’t give to the students,” says Mr Ljungman. “I was thinking about whether I would have less money to spend on my students but on the whole, I have more to distribute for my pupils and teachers.” ….

However,… one Rytmus teacher is less complimentary. “These companies are like parasites, nothing more nothing less,” the teacher says. The expansion of the highly popular Rytmus model … is financially driven …. “Rytmus is like KFC, it is a brand. Expansion is just a way of making more profit. It is about ‘reaching future customers’.” ….

Mr [Jonas] Sjöstedt [leader of the Left party] says there is no question that profitmaking businesses are at fault for the national crisis now known as the “Pisa shock”.

“They’re not [running schools] because they like kids or because they’re interested in education,” he says. “They are doing this because they’re interested in fast money.”

Mr Sjöstedt … admits [though] that drawing a definite link between the poor Pisa results and the increase in private provision is “more complicated”.

“It’s not always the fact that the private schools get worse results … but they do harm [to the system] because traditional municipality schools have to adapt to a market system and they often lose their best pupils,” says Mr Sjöstedt.

This is the most common complaint about free choice in schooling ….. Critics contend that middle-class parents are likely to be drawn to the newer free schools, leaving poorer children stuck in poorly performing older institutions.

Helen Warrell, “Free schools: Lessons in store“, Financial Times, 28 August 2014.

Ms Warrell’s report, though interesting, omits important information and leaves many questions unanswered. A major omission is the fact that privately-run schools receive the same funding per-pupil as municipal schools, and are not allowed to charge top-up fees. Nor are schools, with rare exceptions, allowed to discriminate among applicants for admission.

There is no economic reason, then, for wealthier parents “to be drawn to the newer free schools, leaving poorer children stuck in poorly performing older institutions.” If the attraction of private schools results from advertising and branding (“like KFC”) why, then, should advertising attract a disproportionate number of children from wealthier households? Why do government schools lose their best students to private schools? Do the best students tend also to have wealthy parents?

The stark division of rich from poor, bright from dull, if true, is an anomaly of the reformed Swedish system.

reflections on contributory and non-contributory pensions

August 27th, 2014

I have prepared, for the record, an annotated version of my June 2000 paper “Three Pillars of Pensions? A Proposal to End Mandatory Contributions”. The prologue that follows explains in some detail what I did, and why. This will not be of general interest, but the writing of this paper marked an important moment in my own life, the beginning of my obsession with reform of old age pensions. (That is not a politically correct statement. I should have written ‘pensions for older persons’. But I have never been known for political correctness!)

Without more ado, here is the prologue that I wrote today. The newly annotated paper can be downloaded at the link above.


This is an old, but important paper, one that defined my future work on pension reform. In April of the year 2000, I was at an OECD conference in Prague, listening to presentations of two World Bank economists (Estelle James and Dimitri Vittas). At that moment, it suddenly dawned on me that an ideal pension system should provide basic pensions for everyone, funded pay-as-you-go from general government revenue, allowing citizens who desire more than basic income in retirement to save in any way they please, without subsidies, tax breaks or coercion from government. This was my ‘Eureka’ moment.

When it was my turn to speak, the very next day, I spoke with excitement and enthusiasm. The conference was on private pensions, so the audience did not react warmly to my talk. Nonetheless, I presented my core ideas orally, and drafted a paper immediately after the conference. I circulated it as a UNDESA discussion paper in June 2000. While writing the paper, I discovered that the ideal system I dreamed of was already in place — in New Zealand. Much later I discovered that Mauritius for decades has operated a similar pension system. The universal pensions of New Zealand and Mauritius began long ago, are very successful, but nonetheless have been ignored by the OECD, the World Bank and other development agencies.

The OECD published a version of my paper “edited for length” in 2001 on pp. 385-397 of its “Private Pensions Conference 2000” proceedings. The editors changed the subtitle from “A proposal to end mandatory contributions” to a blander “Is there a need for mandatory contributions?” In my opinion, the OECD editors removed important points from the paper. For the record, I have highlighted all deletions in yellow, so readers can judge for themselves whether anything of importance was omitted.

What most upsets me is the deletion of all reference to Estelle James. Ms James had an enormous influence on my thinking. More than anyone, she is responsible for my obsession with pensions, which began at a conference in Prague, on April 4th of the year 2000. The obsession continues now, at the end of August, 2014.

Regarding length, numerous papers in the conference proceedings are longer than the 13 pages allotted to me. A paper on Romania’s pension system is longest, with 54 pages. The paper co-authored by World Bank economists Estelle James and Dimitri Vittas is much shorter, but still 32 pages long.

“hawks” vs “doves” in the war on terror

August 26th, 2014

FT columnist Janan Ganesh explains how the so-called “war on terror” differs from the cold war.

The cold war carried the highest stakes in history – nuclear weapons saw to that – but it was essentially rational. There were spheres of influence, the dark logic of deterrence and even some grown-up bartering over arms and territory. So when David Cameron watches a video of what seems to be a fellow Briton murdering a journalist in the name of a clerical insurgency in the Middle East, the prime minister’s disgust must vie with nostalgia for the great planetary conflict of his youth. Religious extremists are shapeless, being both sub-state and cross-border, and unrestrained in their violence. There is no Andrei Gromyko, the old dealmaking Soviet foreign minister, to haggle with here.

Another advantage enjoyed by national leaders during the cold war was the legitimacy of their intelligence and security agencies. ….

The greatest threat to UK security is the fraying of this consensus. It began with end of the cold war, when an existential menace disappeared, and continued with peace in Northern Ireland, when paramilitarism declined. Suddenly the security state had to account for its existence. Then came an Iraq war founded at least in part on erroneous intelligence and, more recently, the revelations of British and American surveillance by Edward Snowden, the former US National Security Agency contractor. ….

This is why the talk of “hawks” versus “doves” is so misleading. It is perfectly possible to oppose intervention in another continent while favouring a ruthless defensive posture, including the empowerment of intelligence agencies to track threats of unprecedented elusiveness.

Janan Ganesh, “Cynicism is no match for the mortal threat posed by Isis“, Financial Times, 26 August 2014.

Mr Ganesh (born 1982) joined the FT in August 2012. He is author of George Osborne: The Austerity Chancellor (Biteback Publishing, 2012) and was previously a political correspondent at The Economist.

funding universal pensions in Hong Kong

August 25th, 2014

A member of the government’s Commission on Poverty has suggested a goods and services tax could be used to fund a new public pension scheme, instead of a further tax on payrolls.

The controversial idea was floated by University of Hong Kong academic Dr Law Chi-kwong after a government-commissioned study last week suggested granting every Hongkonger aged over 65 a pension of HK$3,000 per month, with no means test. But Law suggested the plan would be more palatable if only those in greater need were entitled to the subsidy.

The study, by Professor Nelson Chow Wing-sun, a colleague of Law’s …, suggested funding the pension by imposing new taxes of between 1 and 2.5 per cent of workers’ salaries on both employees and employers. ….

But Law said linking a goods and services tax to universal pensions would make the latter more palatable to the public, after former financial secretary Henry Tang Ying-yen was forced to withdraw a plan to introduce the indirect tax amid a public outcry in 2006. ….

“The government would run into a budget deficit even if it did not introduce a universal pension.” he said. “The government would have to raise taxes somehow.”

Law said that if Hong Kong did eventually introduce a universal pension, the government could consider excluding high-income earners from receiving it “so that public resources could be more focused to help the needy”.

Timmy Sung, “Sales tax mooted to fund pension for all“, South China Morning Post (Hong Kong), 25 August 2014.

Introducing a goods and service tax (GST) or – even better – a value-added tax (VAT) in Hong Kong is an idea whose time has come. I fully support Dr Law’s proposal. But I disagree with his idea of  excluding high-income residents from the social pension. An income test is equivalent to a tax on the wealthy, but only on those who are 65 years of age or older. Why not collect more taxes from all the wealthy, young or old, with a higher GST or VAT rate for luxuries, for example? Why burden only the elderly with higher taxes?

I have explained numerous times, on this blog and elsewhere (for example here and here), that means tests are taxes. This is not a controversial statement. Economists on the political Left, Centre and Right agree with it. Non-economists, unfortunately, are often attracted to the idea of reducing government expenditure by limiting benefits to those certified as poor.

Means-tests improve the government’s budget, it is true, but in precisely the same way as increased taxes do. Citizens inevitably finance all government services and transfers of income. There is no free lunch. Some pay indirectly when they are denied benefits. Others pay directly through the tax system.

fees for active asset management

August 25th, 2014

Today the Financial Times publishes yet another article exposing the high, hidden fees of actively managed investment funds.

Headline fees charged by asset managers may be as little as a fifth of the total amount siphoned off from investors, according to research by one of the UK’s largest pension funds.

Railpen Investments, which manages £20bn on behalf of 350,000 scheme members, said it typically paid around £70m a year in upfront, disclosed fees to asset managers.

However, Chris Hitchen, chief executive, said Railpen has calculated that the additional underlying fees it is paying are “multiples of that number, 300-400 per cent of that”.

“What we are getting billed is far less than what is being siphoned off underneath,” said Mr Hitchen, a past chairman of the National Association of Pension Funds. “I don’t think many people have done the analysis. I would think that most people in our position would not be aware of what they are paying.”

Steve Johnson, “Investors’ headline fees ‘only a fifth’ of total“, Financial Times, 25 August 2014.

The annual 70 million pounds in ‘headline fees’ that this large UK pension fund pays to asset managers amount to 0.35% of the fund’s value. This is not unreasonable, but hidden fees increase the cost – in this case, to something between 1.4 and 1.75 percent of assets. These high fees do not include fees that the pension fund itself (Railpen Investments) collects from 350,000 members. Actively managed funds perform no better, on average, than passive funds that track a broad index. After fees, their performance is worse. It is impossible to pick a ‘good’ actively managed fund because there is virtually no correlation between a fund’s performance one year and its performance in a subsequent year. This year’s high performing fund might well be next years dog. Savers who pay for active management, avoiding diversified, passive funds, expose themselves to increased risk and a high probability of lower returns on investment.