Great moments in economic punditry

This is an interesting assertion by the American writer Matt Yglesias:

The big issue that gets left out in pious lectures about comparative advantage is that Smith and Ricardo didn't believe that long-term economic growth was possible! This was the era of economics as the "dismal science", meaning that political economy was essentially the study of how to optimally allocate a fixed pool of resources.

Well, no, the dismal part of the dismal science came a little after Smith and Ricardo. The coinage is actually from Thomas Carlyle in 1849 (long after the deaths of both Smith and Ricardo) and was referring to the awkward fact, awkward for Carlyle, that economics indicated that reintroducing slavery might be a not very good idea. A very bad one in fact and given that Carlyle was advocating its reintroduction in the West Indies a finding that he was a tad angry about and thus the naming.

But over and above that it's quite remarkable to think that the man who has bored us all senseless for two centuries with that reading about the pin factory thought that long-term economic growth was impossible. For that passage, in exhaustive detail, is laying out the foundation of what we now call Smithian growth (or at least Deepak Lal calls it that). The division and specialisation of labour makes that labour more efficient in production. This is exactly how this form of long term economic growth actually happens: more division, more specialisation and trade in the resultant production in fact. Further, to think that Ricardo thought such growth was impossible is most odd. For in laying out comparative advantage he showed how it was true that even if you were worse at doing everything than everybody else then you'd still gain from the economic growth that would come from that division and specialisation: if you and everyone else concentrated on their comparative advantages.

This is more than just a minor snark: Yglesias is edging towards the idea that mercantilism might not be such a terrible idea. Yet it is a terrible one: precisely and exactly because it puts artifical barriers in the way of that division and specialisation of labour across national boundaries. Something that limits that Smithian growth: as Adam Smith was pointing out when he gave us the theoretical basis as to why there can indeed be long term economic growth.

Whether or not whole-life sentences are right, the ECHR is taking over British sovereignty

Jeremy’s Bamber’s successful appeal to the European Court of Human Rights (ECHR), has significance further than simply declaring whole life terms to be against human rights, and therefore allowing those sentenced to have their sentence reviewed and seek appeal. Although many will regard this as a great success for human rights in the UK, this is debatable, whilst it allows familiar concerns about the slow erosion of our sovereignty to emerge.

As  seen in the saga of the only very recently successful attempt to deport Abu Qatada, the ECHR reigns supreme over the UK, and as such, it can overrule decisions by British Courts and Parliament. This has only been confirmed by today’s ruling, which clearly illustrates how Parliament has lost its sovereignty, as the laws it has made no longer necessarily take effect in the UK, as illustrated by the alteration of the whole-life tariff today. The fact that we no longer have power over our own sentencing, and that the Parliament, supposedly the most powerful institution in the country, has been usurped, should be a cause for alarm, and illustrates one of the main problems with our relations with that other overbearing European institution—the EU. 

Separately, the claims that this is a victory for human rights, are, at best, dubious. Whilst it gives some of this country’s worst criminals a chance for release, it does not consider the rights of the victims of the crimes, or their families, who will either be forced to relive extremely uncomfortable events during retrials, or, even worse, be faced with the prospect of someone who has seriously harmed them or their family being released out into the world again. In addition, the threat of a whole life tariff is significantly diminished by this ruling, as lacks the weight it previously had, and so is less of a deterrent to crime.

Then there is the claim that prison offers the possibility for rehabilitation, and so releasing these criminals back into our society is not necessarily a bad thing. This may be all well and good in the case of more minor offenders, but those on whole life tariffs are hardly what you can call minor offenders, with some of Britain’s most notorious criminals, including Bamber himself, Peter Moore, and the more recently convicted Mark Bridger and Dale Cregan. The prospect of such violent and dangerous criminals being released, on the pretence that they have “reformed” is both unreliable, given their often deceptive characters, and disconcerting, as we may see serial killers returned to our streets.

This ruing, therefore, can be seen to have had a strongly negative impact on both sovereignty, sentencing processes, and even our own safety, and, as such, should be regarded with great concern.

Whole-life sentencing is wrong

The European Court of Human Rights has ruled, sixteen to one that whole-life jail sentences, with no possibility of release are "inhuman" and "degrading". I applaud their judgement. Teddy argues that the ECHR deciding for the UK takes away UK sovereignty, but that's fine with me so long as they make the right decision. Given the justifications we have for prison in general, complete life sentences make little sense.

Why do we keep people in prison? There have typically been four reasons people have given for punishment of any sort: deterrence, direct prevention, rehabilitation, and retribution. I think it's clear that retribution has no place in a just system, and should be dismissed out of hand. In discussing the import of the others in the question it must always be kept in mind that there is a very strong presumption in any instance that someone should not be in prison. Firstly, this is because prison is the archetypal restriction of freedom, and secondly because prison is extremely costly and we know that there are always other good uses for the resources they take up.

If there is any place for prison in a good society, then it is to keep dangerously ill people away from the others. The restriction on their liberty is justified by the extremely high costs they impose on others. But even in these cases we must always be vigilant. Even if someone is incurably violent when sentenced, they may not be five years later. If they are incurably violent deterrence may play little impact, and rehabilitation may not be possible. So the only question is whether they pose further harm to society. If they do not, we lack any justification for keeping them in prison. Given that individuals' circumstances, mentalities, and tendencies do change—and indeed should be expected to change more extensively if we expect more advanced treatments to become available—then we must surely not tie our hands in the future. And bear in mind that the boards deciding these issues are by no means unerring in the first place.

What of deterrence? Certainly it is clear that the prospect of one's entire life spent in prison is more unattractive than say, 25 years. And since it may be impossible to distinguish between incurable threats to society and crimes of opportunity in original sentencing we might need to sentence individuals longer in order to preserve prison's deterrent effect. But I'd question how different the expectation of a long stretch, say 25 years, and life really is to an offender, given how heavily people tend to discount the future. This compounds when we remember there is no certainty an offender will get caught or given the maximum sentence. If the difference in perceived costs to potential offenders is low (as I suspect), then it's likely the benefits from extra freedom, lower costs, and a more rational system outweigh the cost in lower deterrence.

Finally, we turn to rehabilitation. The statistics on recidivism and rehabilitation are fuzzy for various reasons, but 2011 data suggests around half of ex-prisoners are proven to reoffend (unproven numbers may be higher). Given that the same stats show that those who committed similar crimes, but who were given community orders, were much less likely to reoffend, I think there is a basic case for what seems obvious—putting people together with criminals, depriving them of time to gain skills and experience, and stamping with the badge of a convict is unlikely to guide them away from a life of crime. In any case rehabilitation is basically irrelevant for those sentenced to a whole-life, since they will by definition never be released into society.

So rehabilitation doesn't help the whole-life case, prevention by incarceration doesn't either, and deterrence only helps slightly. Therefore I believe the basic right individuals have to liberty, combined with the huge cost of prison means the ECHR is right to bring an end to the practice of life sentences without review.

I really don't believe in macroeconomics you know

I've long been making the point that in the long run it's all microeconomics. How the world will look, the wealth of the people, the consumption opportunities, the technologies used, by our grandchildren will have almost nothing at all to do with whatever macroeconomics is practised right now. They will all, however, be hugely dependent upon the microeconomics we practise now. The incentives in the economy to innovate primarily. If we look at the economy over a couple of centuries, for example from Adam Smith's day to our own, seemingly vast macroeconomic events like the Great Depression are little squiggles away from the long term fundamentals.

However, I also am not sure that I believe in much of macroeconomics simply because we so often find people cooking the books. As seems to be happening in Italy: 

Beppe Grillo, leader of the opposition 5-Star Movement, has long hammered on this point. In April, during the post-election interregnum, he’d clamored for “the immediate payment of about €120 billion” that the government and public entities owed the private sector. The government’s refusal to pay its suppliers violates EU rules. But the EU has soft-pedaled the issue, for two very big reasons: payment of arrears would force Italy to sell a truckload of bonds when there might not be any demand; and it would push the deficit way beyond the 3% line in the sand. Thanks to cash accounting, only actual disbursements make it into the deficit figure. Italy has achieved its “austerity” goals by not paying its suppliers. Once again, abracadabra.

Isn't that simply ridiculous? The targets set are because there's a thought that excessive debt (and 130% of GDP can be thought of as that) can lead to a debt spiral: ever more must be borrowed to pay off the old borrowings. This borrowing, above certain limits, must be discouraged, even an insistence on bringing the outstanding stock down.

But having done this everyone then carries on and allows said debtor to continue to borrow. €120 billion is a substantial sum, even when talking about government money, and is somewhere in the 5-10% range of Italy's GDP. That they're running it up in unpaid bills rather than Treasuries makes it no less a set of debts that the Italian taxpayer is going to have to cough up for sooner or later.

Either more debt is a very bad idea and thus all this austerity is a good one, in which case the Italian state cannot be allowed to stiff its creditors. That's just running up the same debt by other means. Or, alternatively, more debt doesn't matter so issue the Treasuries and stop stiffing the trade creditors. But you can only have what the EU is allowing to happen, debt's a very serious matter but keep on running it up all the same if one is being entirely inconsistent.

Which is, as I say, why I'm not sure that I believe very much macroeconomics. They seem to be making it all up as they go along far too much of the time.

Recognising that you've really turned into an economics geek: when you interview the kebab shop owner about the merits of clustering

I'm afraid that I must now confess to really having turned into an economics geek. From someone just interested to someone committed. I found myself interviewing the local kebab shop owner on the merits of clustering last week. I think that counts as falling over the edge, don't you?

There's two ways about thinking through the problem of where to site a retail store. One is, obviously, to site yourself where no one else is. You can then enjoy higher prices and margins as there's no competition. Sometimes people go to extremes, like truck money, where the workers are paid in money that can only be used at the company stores. Other times it's the village shop which can, possibly just, make a living by providing the conveniences that it's not worth going to the supermarket for.

Then there's an entirely opposite view: set up in business where everyone around you is doing much the same thing. Bond Street for expensive clothes, Hatton Garden for expensive presents for mistresses, just around the corner in a street whose name I have forgotten for arty and antique pieces. Sure, you're competing against the other people selling to the same clientele. But you're also all where that clientele can find you. The rich man will know where to go and wander about to find that necklace, picture or garter belt for his temporary inamorata. Or, perhaps more realistically, the younger and prettier half of any relationship will know where to spend the money of the other part of it. This is known as "clustering".

When I first moved to Lisbon I asked a friend where I should go to buy furniture: "this street" was the answer. I was a bit confused but that's how Lisbon retail (before the invasion of retail parks and centres) was laid out. Silver on this street, fish on that, furniture on the other. You browsed the shops knowing that all of the interesting places selling what you were looking for were in this area. Which brings me to kebab shops in Usti nad Labem (in the Czech Republic) where I am working now. Just around the corner from where I write is a kebab house. Been going some time, does a roaring trade (the bus stops that lead from the downtown bars to Studentville are just outside) and then a canny entrepreneur opened a new kebab store right next door. One friend here denounced that as cheating: stealing the business created by the first house.

So I asked Shadab (yes, there are hard working Indian entrepreneurs from Bombay doing this in CR just as there are in the UK), the owner of the original shop what had been the effect on his trade. Increased it, definitely. Competition does indeed mean that he gets less money out of any given amount of foot traffic: but competition can also increase foot traffic so that total revenues can rise for both suppliers. When I shouted "clustering!" he knew I was mad: and I of course knew that I had indeed descended into being a proper geek about economics.

Then again, I should have known this already. There's a reason why all the financial types are in The City. There's a value to knowing where all of the different ways of losing money are located, no?

Schools don't need a new curriculum, they need freedom

Today’s announcement of the reforms to the national curriculum have been met with both praise and displeasure from varying sides of the debate, with Anthony Seldon, head master of Wellington College, heralding the new curriculum as giving essential “building blocks” to allow children to progress with more complex ideas, whilst Brian Lightman, general secretary of the Association of School and College Leaders reacted more critically, suggesting that, “unlike previous versions of the national curriculum, which were drafted with a heavy involvement of teachers and school leaders, these proposals have been driven and closely directed by politicians without that professional input."

However, it is not the allegedly more demanding content of the curriculum which is concerning, nor the way in which many regard it as too heavily under the control of politicians rather than teachers themselves, rather, the continued way in which the government forces what it feels is right upon parents and school children, instead of giving them influence over what their own child learns. Not only does this exemplify the overarching nature of government in the UK, but the emphasis this new curriculum puts on force feeding facts to pupils, under the pretence of providing them with “core knowledge”, besides removing any individuality or element of choice, also is likely to reduce interest in the subjects amongst the pupils, as its less independent nature prevents the students from taking the initiative and developing their study into areas which interest them.

Furthermore, this “one size fits all” approach to the curriculum does not take into account those children with special educational needs, who are approximately 20% of the student body in the UK. This only highlights the problems with the inflexibility of the government and this new curriculum, and shows the need for more choice within schools and for parents to allow them to ensure that all children can receive an education appropriate to them.

Fortunately, this new curriculum is not being enforced on the country’s academies, whose independence allows them to better provide for children individually. However, it must not be forgotten that in fact, although the government has less direct control over academies (e.g. they are not subject to the new curriculum) this may be replaced by the influence of the academy’s main sponsor, rather than parents, so they may not be ideal for providing a more independent education.

Whilst academies are not necessarily the only or ideal solution, currently they appear to be the best available option, due to their relative independence. In addition the way in which they specialise in one area of study allows parents to find a school more closely in line with their children’s strengths and weaknesses. On the other hand they have been criticised as being too selective, meaning that schools choose pupils, rather than the other way round, removing their key justification. Therefore, although they are a step in the right direction, more needs to be done to create both a more flexible curriculum and school system, as while they make up over 50% of English secondary schools, they represent only 13% of the overall maintained sector, which badly needs an injection of freedom.

The problem with democracy

The public is ignorant about politics and lacks even the basic facts that it would need to make sound judgments about political issues. A new poll by Ipsos-MORI shows just how deep this ignorance is. Among other things, the poll found that:

• 29% of people think we spend more on JSA than pensions, when in fact we spend 15 times more on pensions (£4.9bn vs £74.2bn)
• 26% of people think foreign aid is one of the top 2-3 items government spends most money on, when it actually made up 1.1% of expenditure (£7.9bn) in the 2011/12 financial year.  More people select this as a top item of expenditure than pensions (which cost nearly ten times as much, £74bn) and education in the UK (£51.5bn)
• the public think that 31% of the population are immigrants, when the official figures are 13%. we greatly overestimate the proportion of the population who are Muslims: on average we say 24%, compared with 5% in England and Wales.
• people are most likely to think that capping benefits at £26,000 per household will save most money from a list provided (33% pick this option), over twice the level that select raising the pension age to 66 for both men and women or stopping child benefit when someone in the household earns £50k+.  In fact, capping household benefits is estimated to save £290m, compared with £5bn for raising the pension age and £1.7bn for stopping child benefit for wealthier households.

These are not just little mistakes, they’re absolute howlers.

This ignorance is perfectly rational and understandable. The problem is that these are the people who decide who runs the country. How can you choose the best set of welfare policies – ‘the best’ being what you would choose if you had all the information available – when you know absolutely nothing about welfare? How can you choose which of the two main parties is offering the best immigration policy if you haven’t got a clue about immigration?

Obviously, you can’t. And giving more power to well-informed elites seems even more foolish. Political psychology suggests that that the more information you have about something, the more resistant to new, contradictory information you are – or, in other words, the more dogmatically ideological you are.

That ideology is often dressed up in terminology that sounds neutral but makes significant assumptions about the role of the state and its ability to effectively solve society’s problems. Anyone for some ‘evidence-based policy’?

This is a problem not just for elections, but for any kind of administration of the state that gives experts decision-making power. If they are inherently dogmatic then giving them power may be even worse than putting every policy issue up to a referendum may be the lesser of two evils (while still being very unappealing).

The choice we have in a democracy appears to be between open-minded ignoramuses or well-informed ideologues. There is no reason to think that either will choose anything like the ‘right’ policy for any given problem. And, as Jeffrey Friedman has argued, unlike when you buy the ‘wrong’ flavour of ice-cream and can immediately buy a different kind next time, the feedback mechanism in politics is weak and difficult to discern.

The answer may be to recognise these crippling limitations of democracy and, wherever possible, prefer decentralized market mechanisms. We cannot solve the problem of ignorant voters or dogmatic elites in democracy, but we can at least try to take as much power out of their hands as possible.

Chart of the week: Portuguese bond yields jump as government falls into disarray

Summary: Spike on Portuguese bond yields show euro crisis not over

What the chart shows: The chart shows the yield on the Portuguese 10-year benchmark government bond; and the difference (‘spread’) between the yield on its German equivalent

Why is the chart important: With the (admittedly significant) exception of the Cypriot crisis earlier this year, the euro area has been relatively calm since ECB President Mario Draghi last summer promised to do ‘whatever it takes’ to save the euro. However, in the first week of July, there was a brief eruption in Portugal, where the Finance Minister resigned due to the country’s failure to reach its fiscal targets; and the Foreign Minister then resigned because he disagreed with the Prime Minister appointing a new Finance Minister who vowed to continue austerity instead of pushing for growth. But Portugal was the ‘troika’s’ star pupil – doing everything asked of it without complaining. Failure to achieve targets raises a question mark over the entire austerity policy pursued in the euro area; and the rise of politicians in a ‘model country’ questioning it means that the days of austerity – already eroded – are likely to be numbered.

Unintended consequences in everything

Home insulation promoted by the government may end up killing old people in their homes, apparently (hat-tip to Chris Snowdon):

Prof Chris Goodier, of Loughborough University's department of civil and building engineering, said it was vital that homes in the UK better insulated to help meet carbon emission targets and save on winter fuel bills.

But he said the risk of overheating had been overlooked in the "big rush to insulate and make homes airtight", particularly as more extreme weather events, including heatwaves, are being predicted for the UK by meteorologists.

"Overheating is like the little boy at the back of the class waving his hand. It is forgotten about because the other challenges are so big,"

This is nothing to sniff about. Back in 2003, a staggering 70,000 people died in heat-related deaths during a Europe-wide heatwave, partially caused by elderly people living in homes designed to withstand cold winters instead of extremely hot summers.

That heatwave was widely attributed to global warming, which the 'Green Deal' home insulation is meant to stop. But this sort of unintended consequence shows the danger of imposing any one 'solution' to problems in complex systems. If the 'solution' causes problems of its own, those problems will be compounded across a much wider area than if different 'solutions' had been allowed to emerge from the bottom up.

Where there are collective action problems like global warming, the simple solutions that adjust incentives and let the market try lots of little things out (like carbon taxes) beat the grand plans of Very Clever People who cannot possibly know the full consequences of their actions. Of course, even things like carbon taxes may have their own unintended consequences too.

The NHS is going to have a £30 billion a year funding gap apparently

Woes, woes unto us, eh?

The long-term crisis in NHS finances will be laid bare next week when the health service reveals it is facing a £30bn hole in its budget – as a prominent Lib Dem peer suggests charging people to see their GPs. Tim Kelsey, NHS England's information director and a former Cabinet Office adviser on data, said the health service faced a £30bn funding gap by 2020. In an interview with Health Service Journal he said: "We are about to run out of cash in a very serious fashion." He said that next week NHS England would be "publishing a call to action". The document – entitled The NHS Belongs to Us All – is expected to make the case for significant changes to the way hospitals operate. "The financial context is, and our analysis will disclose, that by 2020 there will be a £30bn funding gap in the healthcare system." NHS England's predictions appear to be based on work by the Institute for Fiscal Studies. Last year it calculated that if NHS spending was left to continue to soak up resources at its long-term rate and other on-health public spending is kept at 1% a year, then the funding gap would be about £30bn. When contacted NHS England confirmed that it would be publishing a report next week. "We are not in a position to say more at this stage," it said.

I'm not sure that I can take this. It will mean more Polly Toynbee columns about how the NHS is The Wonder Of The World, so fabulous that absolutely no one has ever tried to copy it.

Now unpack what they've actually said there. NHS inflation has been and is higher than the general inflation rate. This is partly because it's a protected State organism and partly because of Baumol's Cost Disease: services become more expensive relative to manufactures over time.

The solution to both of these problems is to introduce markets. Sure, they can be markets where the financing is still done by the State. But you need a variety of suppliers competing with each other for access to that cash stream in order to increase that productivity. This is obviously true of any organisation suffering from bureaucratitis: but it's also implicit in Baumol's writing on innovation. Yes, it's more difficult to increase productivity (and thus lower the inflation rate) in services but this is why services need to be subjected, even more than manufacturing, to the incentives of market competition.

That the NHS is going to suffer, as a result of its higher than general inflation rate, a £30 billion funding shortfall is why the NHS needs to be subjected to market competition. But do note that given that it is being subjected to market competition its higher inflation rate is going to be moderated: thus there won't be the £30 billion shortfall.

If you prefer, that identified shortfall is exactly why the current reforms must go through: because they're designed to beat that shortfall.

Now, if only we could get Polly to grasp this concept....