Small steps towards a much better world

Changing policy, ideology, popular opinion, media narratives and so on can be very hard. Changing social norms and culture is even more difficult. Thus, when a small technological innovation comes along that can substantially improve things, even in a small area, it really lifts my heart as it seems ‘easy’ and ‘free’.

A recent example is the introduction of PDAs to Florida restaurant inspections (according to a new paper in The RAND Journal of Economics). Getting rid of corruption, making people more conscientious and diligent and designing incentive systems that improve things are all very hard, and that’s why we at the ASI often make the case for tried and true robust mechanisms. But the paper, from authors Ginger Zhe Jin and Jungmin Lee found that this tiny change made a sizeable difference:

In this article, we show that a small innovation in inspection technology can make substantial differences in inspection outcomes. For restaurant hygiene inspections, the state of Florida has introduced a handheld electronic device, the portable digital assistant (PDA), which reminds inspectors of about 1,000 potential violations that may be checked for. Using inspection records from July 2003 to June 2009, we find that the adoption of PDA led to 11% more detected violations and subsequently, restaurants may have gradually increased their compliance efforts. We also find that PDA use is significantly correlated with a reduction in restaurant-related foodborne disease outbreaks.

Enjoy a chart of the finding below, and a full pdf of the working paper here.

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Isn’t this an interesting little finding about drugs?

Isn’t this an interesting little assertion from one of the government’s own reports?

Decriminalising drugs would have little effect on the number of people abusing illegal substances, a highly controversial Home Office report has said.

The report – which sources said had caused “panic” within the Home Office – said: “There are indications that decriminalisation can reduce the burden on criminal justice systems.

“It is not clear that decriminalisation has an impact on levels of drug use.

“The disparity in drug use trends and criminal justice statistics between countries with similar approaches, and the lack of any clear correlation between the ‘toughness’ of an approach and levels of drug use demonstrates the complexity of the issue.”

The point being, and this can be readily verified by anyone with even the most modest experience of social life in Britain, that all those who want to consume drugs are currently easily able to find the drugs they wish to consume. Meaning that the illegality isn’t particularly affecting the availability of supply. Thus decriminalisation seems like a good idea as it’s not going to lead to half the population toking itself into a stupor.

However, that decriminalisation isn’t enough as we’ve mentioned around here before. For the major danger of drugs comes not from they themselves, but from the fact that purity and concentration are, given that they are illegal products, entirely unknown to the user. Overdosing is thus depressingly commonplace, as are all sorts of diseases and illnesses from the admixtures. Thus we need to be thinking very seriously about legalisation: not just decriminalisation of small amounts for personal use but the legalisation of supply and production. For that is how we would get brands, reliant upon their quality and consistency, and also get a transparent supply network that can be checked for quality.

It’s not just the criminality of taking drugs that is causing our current problems, it’s the illegality of supply as well.

What Robert Peston gets wrong about QE

I don’t usually read Robert Peston, now the BBC’s economics editor, but I came across this piece he wrote for their website on the end of the ongoing US quantitative easing (QE) programme. Here he makes the case, overall, that even though QE did not cause hyperinflation (yet!) it could still prove ‘toxic’ because it ‘inflates the price of assets beyond what could be justified by the underlying strength of the economy’. Basically every line of the piece includes something that I could dispute, but I will try and focus on the most important issues.

The first problem is that Peston takes a hardline ‘creditist’ view that not only is QE mainly supposed to help the economy through raising debt/lending, but by raising it in specific, centrally-planned areas (e.g. housing). When we find that QE barely affected lending, it seems to Peston that it failed. But QE does not raise lending to raise economic activity—QE raises economic activity through other channels, which may lead to more lending depending on the preferences of firms and households.

In his 2013 paper ‘Was there ever a bank lending channel?’ Nobel prizewinner Eugene Fama puts paid to this view. He points out that financial firms hold portfolios of real assets based on their preferences and their guesses about the future. QE can only change these preferences and guesses indirectly, by changing nominal or real variables in the economy. For example, extra QE might reduce the chance of a financial collapse, making riskier assets less unattractive. But when central banks buy bonds investors find themselves holding portfolios not exactly in line with their preferences and they ‘rebalance’ towards holding the balance of assets they want: cash, equities, bonds, gilts and so on. This is predicted by our basic expected-profit-maximising model and reliably seen in the empirical data too. It’s good because it implies that monetary policy can work towards neutrality.

This doesn’t mean Peston is right to be sceptical about the benefits of QE. QE has worked—according to a recent Bank of England paper buying gilts worth 1% of GDP led to .16% extra real GDP and .3% extra inflation in the UK (2009-2013), with even better results for the USA. The point is that it works through other channels—principally by convincing markets that the central bank is serious about trying to achieve its inflation target or even go above its inflation target when times are particularly hard. This is not an isolated result.

The second issue is that Peston claims QE isn’t money creation:

Because what has been really striking about QE is that it was popularly dubbed as money creation, but it hasn’t really been that. If it had been proper money creation, with cash going into the pockets of people or the coffers of businesses, it might have sparked serious and substantial increases in economic activity, which would have led to much bigger investment in real productive capital. And in those circumstances, the underlying growth rate of the UK and US economies might have increased meaningfully.

But in today’s economy, especially in the UK and Europe, money creation is much more about how much commercial banks lend than how many bonds are bought from investors by central banks. The connection between QE and either the supply of bank credit or the demand for bank credit is tenuous.

That is not to say there is no connection. But the evidence of the UK, for example, is that £375bn of quantitative easing did nothing to stop banks shrinking their balance sheets: banks had a too-powerful incentive to shrink and strengthen themselves after the great crash of 2008; businesses and consumers were too fed up to borrow, even with the stimulus of cheap credit.

This is extremely misleading and confused. He suggests that printing cash and handing it out would boost the ‘underlying’ growth rate, which is nonsense—the ‘underlying’ growth rate is driven by supply-side factors. He claims that money creation is identical with credit creation, when they are separate things, and he has already pointed out that creating money doesn’t always lead to more credit. We have already seen how credit is not the way QE affects growth, despite what economic journalists like Peston seem to unendingly tell us. Indeed, it seems quite clear that the great recession caused the credit crunch, rather than the other way round.

His ending few paragraphs are yet stranger:

But the fundamental problem with QE is that the money created by central banks leaked out all over the place, and ended up having all sorts of unexpected and unwanted effects. When launched it was billed as a big, bold and imaginative way of restarting the global economy after the 2008 crash. It probably helped prevent the Great Recession being deeper and longer. But by inflating the price of assets beyond what could be justified by the underlying strength of the economy, it may sown the seeds of the next great markets disaster.

It’s not clear at all why Peston thinks that QE would inflate asset prices beyond what could be justified. I’ve written at length about this before. The money a trader gets from selling a gilt to the Bank of England is completely fungible with all their other money. There is no reason to expect they will put this money in an envelope and save it for a special occasion. They try and hold the same portfolio of assets as they did before. Through various channels (including equity prices -> investment) QE raises inflation and real GDP and surprise surprise these are exactly the things that asset prices should care about.

Now Screening: A tragic drama of the London Living Wage

After months of campaigning, no less than 13 strikes and support from the likes of Ken Loach and Eric Cantona, Brixton Ritzy Picturehouse cinema staff have finally secured a commitment to be paid the London Living Wage.

Unfortunately, this means that a quarter of the payroll is now facing the sack:

Picturehouse Cinemas said that the cost of increasing basic wages at the Ritzy Cinema in Brixton to £8.80 an hour would be absorbed by reducing the number of staff by at least 20, with a redundancy programme starting next month.

Two management posts will be axed along with eight supervisors, three technical staff and other front-of-house workers from its workforce of 93.

Naturally, Owen Jones has some insight into the situation:

The message appears transparent: if you fight for a living wage and workers’ rights, then you face the sack. Or we will crush you if you dare to stand up for yourselves.

In fact, the message is even more clear than this. If wages are set higher than it is productive or profitable to do so, the firm will have to account for the cost in other ways. We often talk about the unintended consequences of things like price controls and wage demands, but in this case the consequence of such a pay rise was pretty damn clear. As the Picturehouse explains:

During the negotiation process it was discussed that the amount of income available to distribute to staff would not be increasing, and that the consequence of such levels of increase to pay rates would be fewer people with more highly paid jobs.

The Ritzy previously paid staff £7.53 an hour with a £1/hr customer satisfaction bonus—far higher than the National Minimum Wage of £6.31, whilst union pay negotiators pointed out the Ritzy staff do actually like working there. This makes the idea that job cuts are bitter, tit-for-tat ‘payback’ seem rather perverse. Indeed, to make something sound so heartless and threatening when it is basically Econ 101 is bordering on the petulant.

 In a perfect world low pay simply would not be an issue. In the meantime if employers can afford to give the LLW (or can benefit enough from the PR!), then fantastic. But paying 93 staff £8.80 an hour is no small commitment, and unfortunately pushing company policy in one direction all too often means something’s got to give elsewhere.

Whilst the effects of a National Minimum Wage aren’t always easy to spot, this is a concrete example of the London Living Wage actively putting Londoners out of a living. In personal experience Ritzy employees are friendly, intelligent and helpful, but sadly that’s no guarantee of them getting another job. And if unions continue to push for the LLW in such an aggressive manner, this is unlikely to be the only casualty.

Curzon cinemas have just announced that they will pay their staff the LLW, even though it is loss-making. They say they hope that the cost will become self-financing through the better quality of work which paying people more will achieve. It will be interesting to see if that’s the case.  In any case—grab the popcorn, this show’s going to get interesting…

From the Annals of Bad Research: rock stars die younger

Around here we’re all culturally savvy enough to have heard of the 27 Club: the list of those rocks stars who have died or drink, drugs, suicide etc at the age of 27. We’ve always taken this to be a rather cheery finding: that if you give some 18 year old all the money, booze, drugs, success and sex they could possibly want then it still takes them 9 years to kill themselves through overindulgence. Rather puts into perspective the prodnoses complaining about our having a second glass of sherry before dinner.

However, we’ve just had the release of a report indicating that popular musicians do indeed die younger, on average, than the general population. And thi8s really should be included in our compendious volume, The Annals of Bad Research. For the contention is that the average age at death of rock and roll, rock and pop, stars is lower than that of the general population. But as Chris Snowden points out, we cannot actually know that:

You see the problem here, I expect. Rock stars didn’t exist until the 1950s and since many of them are still alive, we don’t know what their average age of death is. It wouldn’t be at all surprising if they die earlier on average, but the graph above tells us very little about whether this is so. When Chuck Berry (aged 88), Jerry Lee Lewis (aged 79) and Little Richard (aged 81) pop their clogs, the average is going to go up, especially if they keep breathing for another twenty years.

And, who knows? They might. Perhaps the higher risk when young is counter-balanced by the boost to longevity of having lots of money and the best healthcare in old age?

Be that as it may, you clearly can’t work out the average lifespan of a rock star until at least the first generation of rock stars are dead.

Quite: you can only work out the average age of death of any particular cohort when all of that particular cohort are dead. If you try to do it before that has happened then you’ll be counting all of those who die young but not all of those who don’t: meaning that what you’ve actually calculated is the average age at death of those who die young. And, you know, people who die younger die younger isn’t really all that amazing of a research finding.