The impact of interest groups on public policy

Madsen’s lecture, as Senior Visiting Fellow in the Department of Land Economy at the University of Cambridge, has now been posted on the ASI site.

The topic deals with the way in which interest groups impact upon public policy in ways that might be to their own advantage, though not necessarily conducive to the general good.  Madsen identifies with the various ways in which they exert influence on legislators.  He goes on to show how policies can be crafted to deal with their influence and turn it to advantage if possible, and circumvent it if necessary.  He gives examples throughout.

The full text of the lecture can be seen here.

Well of course companies dictate corporate tax rates

How else does anyone think this happens? The point being not that the head of the CBI phones George up and dictates what the corporate tax rate would be (not that George would give much mind to the CBI anyway), but that the rate of tax that can be charged depends upon the reaction to it of those the tax is being levied upon. All of which makes the vapours that people are having over this comment somewhat mysterious:

The UK’s tax policy is effectively dictated by companies and not ministers, according to a leading barrister and adviser to the treasury on its recent “Google tax”.

Philip Baker QC said policymakers and tax experts had learned over recent decades that the mobility of companies and jobs meant there was “no question [countries] have to be competitive to survive”. As a consequence, governments had to provide the tax policies that international corporations wanted.

So, why do we not have 100% income tax rates on pay over £7.00 an hour? Because we know that just about everyone would bugger off out of the country making being the politicians running it really no fun at all. why don’t we have VAT at 100% on everything? Because that storm for the ferries would be just the same as most fled such an extortionate tax regime. If, of course, we didn’t all just ignore it and deal in cash.

so, why do we have a reasonably reasonable corporate tax system and rate? Because it’s easy enough for a company to leave the country and go and try to make a profit elsewhere. Therefore their mobility really does tax our ability, dictate to the government, to tax them.

There’s really nothing mysterious about this at all. We all realise that a restaurant where they ceremonially spat on the soup at each and every table would get very little customs (not none as there’s nowt so strange as folk) for we would be dictating our rejection of the practice by staying away.

Why would anyone think that taxation would be different?

Misconceptions about Europe

Madsen has written a think piece listing seven common misconceptions about Europe that are certain to feature in the referendum debate.  They are:

  • The EU is “Europe”

  • If the UK leaves, it will, like Norway, have to follow rules it cannot help shape

  • That the UK has not lost sovereignty, only pooled it with other EU members

  • That the EU membership involves sacrificing some sovereignty in return for substantial economic growth

  • That huge numbers of UK jobs would disappear if the UK left the EU

  • That foreign investment into Britain would cease without EU membership

  • That special interests (such as universities and farmers) could not manage without the EU grants they receive

Madsen concludes:

It is quite possible that Mr Cameron will secure an advantageous deal from his EU colleagues that allows the UK to protect its sovereignty while enjoying a vigorous trading relationship with its partners.  If he does, the British people might well vote to accept that deal.  It will be better for the debate leading up to that vote, however, if the above misconceptions about the Europe and the EU are laid to rest.

You can read the full text of his piece here.

From the Annals Of Really Bad Science Journal

This is simply terrible:

Imposing a minimum unit price for alcohol leads to a dramatic fall in drink-related crime, including murders, sexual assaults and drink-driving, a new study shows.

Crimes perpetrated against people, including violent assaults, fell by 9.17% when the price of alcohol was increased by 10% over nine years in the Canadian province of British Columbia. Motoring offences linked to alcohol, such as killing or injuring someone with a vehicle and refusing to take a breath test, fell even more – by 18.8% – the study found.

An interesting finding but how good is the science?

Method:
A time-series cross-sectional panel study was conducted using mixed model regression analysis to explore associations between minimum alcohol prices, densities of liquor outlets, and crime outcomes across 89 local health areas of British Columbia between 2002 and 2010. Archival data on minimum alcohol prices, per capita alcohol outlet densities, and ecological demographic characteristics were related to measures of crimes against persons, alcohol-related traffic violations, and non–alcohol-related traffic violations. Analyses were adjusted for temporal and regional autocorrelation.

Results:
A 10% increase in provincial minimum alcohol prices was associated with an 18.81% (95% CI: ±17.99%, p < .05) reduction in alcohol-related traffic violations, a 9.17% (95% CI: ±5.95%, p < .01) reduction in crimes against persons, and a 9.39% (95% CI: ±3.80%, p .05). Densities of private liquor stores were not significantly associated with alcohol-involved traffic violations or crimes against persons, though they were with non–alcohol-related traffic violations.

So, they examined minimum alcohol prices and traffic violations in British Columbia. What did they not measure? Changes in traffic violations in Canadian society in general. In, perhaps, areas that did not have the rise in minimum pricing.

For all the ordure that it thrown at economists and their models these days at least this would never be published in an economics journal. Because the first reviewer, heck, even the editor pondering whether to send it out for review, would first ask, well, what was that general change so that we can measure the effects of this specific change against it?

Not that we’re about to do that detailed analysis, we’ll leave that to the excellent Chris Snowdon over at the IEA. But an indication from Canada’s 2010 crime statistics:

In 2010, police reported about 84,400 incidents of impaired driving (Table 4). The number of impaired driving offences reported by police can be influenced by many factors including legislative changes, enforcement practices (e.g. increased use of roadside checks) and changing attitudes on drinking and driving.

The 2010 rate of impaired driving was down 6% from the previous year, representing the first decrease in this offence since 2006 (Chart 14). The rate of impaired driving has been generally declining since peaking in 1981.

No, we don’t know but we’ve got at least a definite impression. Booze related driving incidents have been declining in general for 30 years. To the point that in the final year alone of this paper’s measurements they actually declined nationwide by 6%. And they’re trying to pin an 18% decline over a decade on a minimum price change that only happened in one province?

And they don’t compare the declines in that one province with other provinces?

This might be all sorts of things but it ain’t science, is it?

But this is impossible under modern monetary theory!

Or perhaps we should revise that to a “this is impossible under a deeply deluded understanding of modern monetary theory”. For there’s a certain segment of the populace who insist that banks just make up money out of thin air. So, therefore, this can never happen:

Ordinary Greeks rushed to withdraw cash from ATMs in the early hours of Saturday morning. Greece’s Alpha Bank stopped all online transactions according to its website on Friday night.

If banks do just create money ab nihilo then this cannot possibly happen. There is no possibility of a bank ever running out of money, is there? But this is happening. Therefore it cannot be true that banks do indeed just create money out of nothing.

The confusion comes from the way in which credit is created: this is indeed done by the banking system in a fractional reserve banking system. You or I go to borrow money and the money we borrow is indeed simply created, as a ledger transaction, by that bank at that time. So, to some that seems the end of the matter. But at 4 or 4.30 that afternoon, that bank has to balance its books. It must have sufficient deposits to fund all of its loans, and if it does not through its branches it must go out into the more general market and solicit some more deposits. So, that effortless creation of money only lasts until that daily point at which it must balance the books.

And, of course, the same occurs in reverse when people are reducing their deposits at said bank. It must either claw back the loans it has made (something that takes time) or it must collect more deposits from the wholesale system or it must deny people the right to extract their deposits. Because, once a day at least, those books must balance.

In a world where banks effortlessly print or make as much money as they wish banks runs cannot happen. We are seeing a bank run: therefore banks cannot effortlessly print or make all the money they wish. Monetary theory’s just great but even that has to be checked against reality occasionally.