Another reason why Keynesian economics doesn’t work

Let us imagine that this Keynesian idea that government should spend more money in a recession stands. Not that we’d want to give in to the case in general, but let us assume it for the moment. Why might it still not be a good idea to depend upon this tactic? As Larry Elliot explains:

The second drawback is that the investment – even assuming it happens – will take time to arrive. Every EU country has sent in a list of pet projects and these will have to be assessed by a panel of experts before a final list can be drawn up. This is a recipe for bureaucratic delay and the customary horse-trading as each country demands its share of the action. It is unlikely work will begin on a single project until 2016, when what Europe needs is an immediate boost to demand.

That could come in three ways. It could come from a more meaningful push from the centre, perhaps through the European Investment Bank. It could come from nation states if they were given more budgetary leeway by Brussels to run bigger deficits until growth has returned. And it could come from the European Central Bank through a quantitative easing process. The latter is by far the most likely and will dwarf in size what the commission has just announced.

Government, most especially at the EU level, is simply such a lumbering and inefficient giant that it’s not possible for it to get such fiscal stimulus moving in the required timescale. Very much like the American experience of insisting that there were all sorts of “shovel ready” projects out there, then finding that government rules mean that nothing is ever shovel ready. There’s always a year or more of paperwork to fill out before anything can be done.

With us still accepting the basic premise, that the deficit should widen, that there should be a greater gap between tax revenues and government expenditure in a recession, perhaps we should be looking for something that acts near immediately instead of increased spending? Like, say, an automatic reduction in national insurance payments in a recession? Like, umm, Keynes himself said would be a good idea?

Our visa system is failing international graduate entrepreneurss

The Entrepreneurs Network has just released a new report. Based on a survey of 1,599 international students, Made in the UK: Unlocking the Door to International Entrepreneurs reveals how the UK’s visa system is failing international graduate entrepreneurs who want to start a business in the UK.

Undertaken with support from the Adam Smith Institute and in partnership with the National Union of Students (NUS), we find that a significant proportion of international students – that is students coming from outside the EU – have entrepreneurial ambitions. In fact, 42% of international students intend to start their own business following graduation. However, only 33% of these students, or 14% of the total, want to do so in the UK. Clearly we are doing something wrong.

The Tier 1 (Graduate Entrepreneur) visa was set up in 2012 to encourage international graduates to start their businesses when post-study routes were taken away. However, uptake has been woeful and the results of the survey suggest this isn’t likely to change any time soon:

  • Just 2% of respondents intending to start a business following graduation applied for the UK Tier 1 (Graduate Entrepreneur) visa, with almost two thirds, 62%, saying they didn’t even consider it.
  • Nearly half, 43%, of respondents think their institution is certified to endorse them for a Tier 1 (Graduate Entrepreneur) visa.
  • Only 18% think that the UK has better post-study processes in place for international students than other countries; 32% think it is worse than other countries.

Based on these and further findings, the report puts forward nine recommendations for government, including:

  • Removing the Tier 4 ban on self-employment for those working within an institutional programme (curricular or co-curricular) or other accelerator.
  • Allowing UKTI-approved accelerators to endorse international students in their programmes under the Tier 1 (Graduate Entrepreneur) scheme.
  • De-coupling the risk for educational institutions in endorsing international graduates for Tier 1 (Graduate Entrepreneur) visas from institutions’ Tier 4 license. This should be made explicit in the official Home Office guidance and in the way the Home Office applies its audit procedures for institutions.
  • Reinstating a post-study work visa, de-coupled from the sponsor system, to allow international students to explore markets and industry before finalising their business idea for the Tier 1 (Graduate Entrepreneur) application. In fact, 81% of the respondents considering starting their own business are interested in the possibility of permanent residency under the Tier 1 (Graduate Entrepreneur) visa.

Our visa system isn’t supporting the entrepreneurial ambitions of international graduates. As things stand, we are training some of the world’s best and brightest young people at our world-class universities only to push them to set up their businesses overseas.

Philip Salter is director of The Entrepreneurs Network.

Markets make us better people

One of the most common objections to market-based societies is that they erode non-market motivations to doing good. Critics, with this objection, say that although markets can in some areas latch onto greed and turn it to society’s benefit in some areas (“It is not from the benevolence of the butcher, the brewer, or the baker, that we can expect our dinner, but from their regard to their own interest”) they can also pervert and corrupt existing motivations in domains where markets are inappropriate.

Consider blood donations: many argue that if you start paying for blood donations then people will stop seeing them as a good deed but as a market activity, and lose their ‘intrinsic motivation’ to give blood. Overall you might get less blood, or less good blood than before, even though you’re now spending money to get it.Back in 2012, Harvard communitarian political philosopher Michael Sandel (famous for his online lectures), wrote a hugely popular book What Money Can’t Buy: The Moral Limits of Markets making roughly these arguments (read a wonderful review here).

These questions are discussed widely, but what’s weird is they tend to be tackled mainly with a priori thought experiment arguments like mine about blood, above, and anecdotes, even though they are empirical questions. We can actually test whether you get less or worse blood when you pay for it! (You don’t) We can test whether people are less pro-social when you add extra market institutions!

A new paper by Björn Bartling, Roberto Weber and Lan Yao, “Do Markets Erode Social Responsibility?”, in the Quarterly Journal of Economics tries to do as much:

This paper studies whether concerns for social responsibility persist in repeated market interaction. We develop a laboratory product market, in which socially responsible behavior by firms and consumers involves incurring additional production costs to mitigate potential negative externalities imposed on individuals otherwise uninvolved with the market.

The data from Study 1, conducted in Switzerland, show, first, that there is a non-trivial share of socially responsible products supplied and demanded in all our market conditions, and that—importantly—the market share of the fair product is stable over time in all conditions.

Second, the socially responsible product, which costs more to produce, sells at a price premium that persists with market experience. In most cases, this price premium increases over time, suggesting that consumers’ willingness to pay for socially responsible products is not eliminated with repeated market interaction. Third, we show that individual-level market behavior is consistent with a preference for positive social impact, though such concerns are heterogeneous.

In other words: markets do not erode existing pro-social motivation; they complement it.

Pay is determined by your best alternative job

Economic theory tells us that we really ought to be paid our marginal productivity. And no one at all believes that that actually happens in detail. However, we can take a step back to a point which even Karl Marx got, which is that your pay will reflect the demand for labour. More specifically, the better the alternatives you have the more your pay is going to go up. And here’s a nice little story from the Frozen North to illustrate that:

There’s been a lot of attention paid to how Canada’s oil boom has helped make gasoline cheaper. What many people may not realize is that the boom is also driving up the prices they pay for burgers and steaks.

Surging energy investment in Prairie Provinces, home to most of the nation’s farms and cattle ranches, has boosted domestic crude output to a record and sent pump prices to a three-year low. That’s led to jobs on drilling rigs or pipe crews paying two-thirds more than those in livestock, luring cowboys and beef-plant workers to the oil patch.

By cowboy there they really mean more what we English might call a cowman, rather than some Bill Cody type. But it’s obvious what is happening. There’s no more to do out on the prairie than just oversee the creation of cowpats and that’s driving up the wages of those who are there. It’s the very same process that leads to a hairdresser making very much more money in the UK than one in China does: the pay of hairdressers is not determined directly by the productivity with comb and scissors, rather by the pay on offer in the next alternative job.

This doesn’t mean that the economic theory is wrong though: only that it operates in a rather clunky manner and so is something that gets tended towards rather than an equilibrium state at which we all always exist. As higher productivity jobs appear then they will tempt away some of the labour force. And so all wages tend towards the productivity of the work being done.

At which point we might have a little snark about the UK. There’s a lot of complaining going on that the jobs being created these days aren’t very well paid, something which is true. But it’s also true that the highest productivity jobs in the UK have for some decades been those in wholesale finance in The City. Which is exactly the sector that those same complainants are determined should shrink.

Just like oil wells push up wages for cowboys, so does shutting down highly paid jobs in banking reduce other wages in the same economy.

The plain truth about plain packaging

I suppose you have to try policies out before you conclude whether they’ve worked or not. But now we’ve tried out plain packaging and it didn’t work according to its own aims, can we maybe give up on it? A new paper from scholars at the Australian National University, aptly entitled “The Plain Truth about Plain Packaging: An Econometric Analysis of the Australian 2011 Tobacco Plain Packaging Act”, and the first proper study of the scheme, brings the news.

Ronald Coase famously argued that if you tortured the data long enough they would confess. In this paper we have tortured the data, but there has been no confession. At best, we can determine the plain packaging policy introduced in December 2012 has not reduced household expenditure of tobacco once we control for price effects, or the long-term decline of tobacco expenditure, or even the latent attributes of the data.

To the contrary, we are able to find a suggestion that household expenditure of tobacco has, ceteris paribus, increased. In our forecasting exercise the actual data come close to breaking through the 80 per cent confidence interval. While we do not want to over-emphasise these results, we do conclude that any evidence to suggest that the plain packaging policy has reduced household expenditure on tobacco is simply lacking.

Of course, the ASI had already been suggesting this is the result we would find based on simpler analyses; and don’t forget that it is not a costless policy. If smokers derive extra pleasure when they smoke from getting their cigarettes from attractive branded packets then this is a benefit of branded packets, not a cost. And note that underage or young smokers, typically short of cash, tend to smoke cheaper cigarettes—Richmonds and Mayfair were my friends’ choices when they were 14.

Funnily enough, this paper’s release coincides with new evidence from the Office for National Statistics that e-cigs do not bring non-smokers into the tobacco fold.

E-cigarettes are almost exclusively used by smokers and ex-smokers. Almost none of those who had never smoked cigarettes were e-cigarette users.

Not really a surprise. But then even if e-cig users did include some who had never smoked before, this doesn’t imply that they moved from (safe) e-cigs to (dangerous) cigarettes. What’s more e-cigs have a number of benefits, that I tried to sum up when the EU tobacco directive came up in April, as part of a case that the anti-smoking crackdown has gone too far.

1.  Nicotine has many substantial positive effects

2. Smokers overestimate the dangers of smoking

3. Passive smoking may not be dangerous (at least to women)

4. Smoking is social, enjoyable, creates identity and meaning, and relieves boredom

5. Lifetime health expenditure is lowest for smokers

(If I was writing today I might add 6. Smoking substantially reduces Parkinson’s Disease risk, especially if you do it lots and don’t stop and this is true for other diseases as well).

The point is not that we should all start smoking, although there is actually a good case that nicotine is a nootropic—see the first link above—it is more that smoking has substantial benefits to the individual (as well as the noted health costs), and relatively low net costs to society, especially when you factor in the huge amount smokers pay through tobacco taxes. When we turn ‘smoking’ into ‘smoking e-cigs’ the costs evaporate, probably entirely, and the benefits remain.

Cracking down on traditional tobacco may have gone too far—but cracking down on ecigs is crazy.