Why does the son rise?

John Cochrane recently gave a speech where one of the main threads involved talking down the importance of income and wealth inequality. Poverty, and generally not having as much as we would like are bad, he says, but is there anything bad about inequality per se? That is: is there at least one respect in which things would be better if some people who are very well off were made worse off? He argues that there isn’t, or if there is, it is of only trivial importance, and outweighed by all of the costs of actually ‘doing something’ about inequality.

In a response on Bloomberg View, Noah Smith argued that economists should respect people’s actual preferences, and since people show strong preferences against wealth and income inequality, we should respect them. He uses the example of how people prefer to take nothing over free money when they are made offers they perceive as ‘unfair’ in the Ultimatum Game. On top of that, he says, inequality leads to socio-political unrest, which we can all agree is very bad and costly, citing a 1993 paper.

Finally, Tony Yates adds some extra arguments on his blog. He says luck has a big role to play in success, but success can also buy some of the non-luck factors in success (e.g. education), meaning that it can ‘set off path dependence’—according to Yates this can lead to inefficient outcomes by distorting the allocation of talent. He says inequality reduces public good provision (e.g. education). And he says that inequality might make ‘crony capitalism’ more likely.

I’ve written twice about equality before: once saying that Rawlsian-style justice demands inequality of wealth/income in certain very relevant circumstances; another time arguing that Hayekian-style information economics militates towards equality of wealth. There are lots more things to say in this debate, but here I intend to take issue only with one of Yates’ claims: the idea that luck + path-dependence means inequality is passed down through the generations (I can’t see why exactly he thinks this distorts the allocation of talent, but here I’m only questioning the mechanism).

Luck is certainly a huge factor in success. And people do pay big money for better education to try and make sure their kids are more likely to succeed. But does this work? Let’s look at some studies. Random selection into a better school in Beijing has no effect, random selection into a better school in Chicago has close to no effect, random selection into a better Kenyan school has no effect, nor does it in Missouri, nor in New York City. Once you control for student characteristics, Australian private schools didn’t outperform state schools on the 2009 PISA. Conscription into extra education didn’t much affect life outcomes in late 1970s France. The literature is huge and there are many many more examples.

And other literatures point to the same conclusion. For example, we now know that the heritability of intelligence increases through life (to hit around 50-90% in adulthood), while ‘shared environment’—upbringinging, parental inputs and schooling—falls to around zero. This is supported by traditional twin studies, twins reared apart studies, adoption studies, and now whole-genome analysis.

So it should not be surprising that it’s actually really really really really hard to make sure your descendants stay rich with the proceeds of luck. In fact, we know that that’s not why the descendants of the rich often are rich because we have a couple of pretty good experiments showing it! For example:

We track descendants of those eligible to win in Georgia’s Cherokee Land Lottery of 1832, which had nearly universal participation among adult white males. Winners received close to the median level of wealth – a large financial windfall orthogonal to parents’ underlying characteristics that might have also affected their children’s human capital. Although winners had slightly more children than non-winners, they did not send them to school more. Sons of winners have no better adult outcomes (wealth, income, literacy) than the sons of non-winners, and winners’ grandchildren do not have higher literacy or school attendance than non-winners’ grandchildren. This suggests only a limited role for family financial resources in the formation of human capital in the next generations in this environment and a potentially more important role for other factors that persist through family lines.

The same is true for modern lottery winners—the truest example of pure luck in success. And it took only two generations for the descendants of slaves to catch up with the much more advantaged & wealthy free blacks. Basically luck mixed with path dependance explains almost nothing.

Copyright reform is not a joke

Yesterday was a good day for mischief-makers, for it saw an amendment in the law to permit the use of copyrighted material ‘for the purposes of parody, caricature or pastiche’ without having to first seek permission from the rights holder.

Indeed as if to celebrate, the infamous Cassetteboy released a (NSFW!) glorious mash-up as a homage to our dear PM in the form of Cameron’s Conference Rap.

Given so much of the great British humour, it’s bizarre to think that permissionless piss-taking has up to now been verboten. Tools like parody and caricature are part of our cultural heritage, used to make important political statements and hold the powerful to account just as much as they are employed for light relief. Nevertheless sketchwriters for the BBC and student drama societies alike have had think carefully about their work or else risk court action, whilst takedown and infringement notices litter the remix, remake channels of YouTube.

This exemption allows copyright law to better reflect people’s actual habits and cultural opinions. It also lends intellectual property regimes a greater overall legitimacy, which could prove valuable when encouraging behavioural changes and in tackling issues like piracy.

It will enhance our cultural commons, thanks to the new (and newly-legitimized) avenues of expression and unleashed creativity. Lifting the restriction on social and commercial innovation will also yield economic benefits, with the government’s Hargreaves Review suggesting that it could boost the economy by between £130-650m per annum.

Works will still be subject to the ‘fair dealing’ criteria, which only allows for a limited amount amount of a copyrighted material to be used. No doubt this will prove problematic at times- for example, do Downfall parodies involve only a limited amount of the original film? Copyright holders will still also be able to legally challenge a work for infringement, then requiring the artist to prove in court that their work is in fact actually side-splittingly hilarious or a devastating work of satire.

Depressingly, as insignificant as the exemption seems, it is one of the very few pieces of sensible copyright policy to emerge in recent years (and it still took the ORG 9 years of campaigning to achieve it). Modern copyright law is beyond a parody. It is overlong, over-broad, a drain on resources and a chill on innovation. It is no longer a vehicle to foster creativity, but a monster caused by rent-seeking and lobbying by vested interests. And the excessive, damaging ideas – from extending copyright further, to imposing harsher criminal sanctions on infringers and threatening search engines with anti-piracy legislation - continue.

There are a number ways in which we could radically reform copyright law whilst maintaining the commercial incentives to create (many of which are for another blog!)  However, given the number of international agreements on intellectual property the UK is signed up to, the gradual expansion of ‘fair dealing’ exceptions (say, to cover all non-commercial uses of copyrighted work) could be the most politically viable way of reducing the deadweight loss caused by current copyright laws.

Even this seems like a long-shot though, particularly given how long it has taken to get such a reasonable exemption applied. Copyright laws might be a farce, but they certainly aren’t very funny.

The latest attempt from the booze wowsers

We do love this latest attempt at justifying minimum alcohol prices:

Minimum alcohol pricing of 45 pence per unit would be 50 times more effective in targetting harmful drinking than current policies which only ban the selling of alcohol as a loss leader, research suggests.

Really?

Researchers at the University of Sheffield compared the effects of the two policies on public health using a mathematical model alongside General Lifestyle Survey data to estimate changes in alcohol consumption, spending, and related health harms among adults.

What did that model look at?

In their findings, published by bmj.com, they estimated that below cost selling would increase the price of just 0.7 per cent of alcohol units sold in England, whereas a minimum unit pricing of 45p would increase the price of 23.2 per cent of units sold.

They estimated that below cost selling would reduce harmful drinkers’ mean annual consumption by just 0.08 per cent – or around three units per year. By contrast, a 45 pence minimum unit price would reduce consumption by 3.7 per cent or 137 units a year – a 45 times greater effect.

So they plugged the price change into their estimate of the elasticity of demand and found that….wait for it, wait for it….higher prices reduce demand and or consumption?

Gosh, do we really need a team of highly trained and expensive alcohol researchers to tell us that?

Unfortunately this latest paper fails to tell us the three things we’d actually like to know about minimum alcohol pricing.

This first being should we be attempting to reduce consumption in the first place? Current levels of booze taxation more than cover the public costs of boozing. There are, indeed, substantial private costs remaining: but those are being carried by the people doing the boozing which is just where they should be. Is there actually a reason or justification left for public policy action in this case?

The second is whether that rise in prices actually reduces harmful drinking, or just deters the occasional tippler from a small pleasure. There is, after all, fairly convincing evidence that the addict will always feed their addiction while the diletante is more amenable to price signals.

And thirdly, even if the above can be answered in a manner that leads to our wanting to increase the price, why on earth would anyone want to have minimum pricing? Not only is it illegal under EU law but it puts the extra cash into the hands of the retailers and manufacturers. Rather than into the Treasury as would be the case if prices were raised through higher taxation.  Minimum alcohol pricing just doesn’t make sense.

A reminder to Bill of Rights drafters: all we need is one right

“It’s not just the European Union that needs sorting out,” UK Prime Minister David Cameron told his Party Conference this week, “it’s the European Court of Human Rights.” This is not the first time he has said that: he said it to the judges’ faces a couple of years back, at the ECHR’s gleaming headquarters in leafy Strasbourg. They were not overly impressed. But his audience this week thinks he is spot on, and most people in the UK probably agree.

The ECHR is not an EU body but emerged out of the postwar European Convention on Human Rights. In other words, no Parliament agreed to it, no British citizen voted for it, no Prime Minister signed a treaty authorizing its power. Like Topsy, it ‘just growed.’

We are all in favour of human rights, of course, but countries disagree on exactly what those rights should be and how they should be enforced. The UK, in particular, has a very different legal tradition from other European countries – one that has served them a long time, and which they are justly proud of. But being empowered to overturn the decision of the courts in the UK and other countries, the ECHR is effectively imposing one legal regime – a judge-led regime – on everyone.

But why do we want the law of different countries to be identical? We can learn a lot from different countries running their affairs in different ways, then looking to see which way is preferable. Imposing a single legal view on a large number of countries prevents that learning from taking place.

And why should an unelected body deign to override the decisions of different countries’ courts and legislators anyway? Originally, the plan was that the ECHR would simply influence governments to ‘do the right thing’. But now, though it has no democratic legitimacy, it can override the decisions of UK courts and elected UK representatives. So in effect, law is being made by ECHR judges, and countries like the UK are bound by its decisions. That, as Lord Judge pointed out, gives us “a very serious problem with sovereignty”.

That is a particularly serious problem when a country thinks that its entire security is at risk. More than once, the ECHR stopped the deportations of suspects to face serious charges, including terrorism and genocide charges, to face trial overseas. Indeed, the ECHR has stopped deportations of foreign nationals already found guilty of serious offences abroad. Often, the grounds for such decisions have been the UK family ties of the accused, or their ‘right’ to the UK’s generous healthcare system. But what really got ministers’ goat was the Court’s blocking, for a long time, of the deportation of the radical Abu Qatada, wanted on terrorism charges in Jordan.

So now, the UK is to have its own new Bill of Rights, passed by Parliament. Actually, our old one, dating from 1689, has served us pretty well. I only hope that in drafting the new Bill, ministers do not fall for the nonsense perpetrated in the postwar settlement – things like the ‘right’ to free education. Because every right is someone else’s responsibility to provide. You can be sure that every lobby group will be out there, campaigning for ‘rights’ to this or that or the other, all at taxpayers’ expense of course, to be included in the Bill.

But in fact, all we need is one right – the right to be left alone without other people, and especially governments, pushing us around.

If Mr Cameron calls, I will gladly give him a draft.

Greenpeace really is getting desperate here

Desperate in the sense that they’re now claiming that if the people whose lives get disrupted by fracking get a share of the money from fracking then this would be bribery. Rather than what we might normally call it, compensation:

Jim Ratcliffe, the 61-year-old industrialist who founded the chemical giant Ineos, is promising to hand more than 6% of future shale gas revenues to those sitting on the reserves or affected by their extraction, in an effort to replicate efforts in the US where shale gas has created scores of new millionaires. The situation in America contrasts starkly with that of the UK, where efforts to develop the controversial new energy source have been delayed by landowners, environmental groups and the planning system.

Simon Clydesdale, UK energy campaigner at Greenpeace, said: “This is just more of the same bribes and bulldozers approach that has already proved a failure. With one hand the fracking industry goads the government into steamrolling people’s right to oppose fracking under their homes, with the other it offers cash incentives.

“The industry forgets people have legitimate concerns about fracking that won’t be easily assuaged by cash sweeteners.”

It’s all very Dave Spart isn’t it?

Leaving the Trotskyist Hippies aside the interesting part of this is that we seem to have reversed, to some extent, the nationalisation of fossil fuel reserves that happened many decades ago. It’s a standard of landowning law that the landowner owns the minerals underneath it. Except for gold and solver and then later we added fossil fuels to the list nationalised. Given that there would therefore be no benefit to landowners of fracking under their land there’s been a certain resistance to allowing it.

However, the government has lowered the tax rate on gas and oil brought up through fracking: allowing that Coasean bargain to be struck again between the drillers and the landowners. There’s now room in the sums for compensation to be offered: and thus compensation is being offered.