Regulation, big government, public debt: not so benign

What is it about Cambridge University economists? They've always been bad, but they seem to be waging some kind of orchestrated campaign right now. Every time one speaks (like Michael Kitson at this week's Economic Research Council Hayek-Keynes debate), they seem to produce the same sound-bites, designed to assure us that regulation, big government and public debt aren't so bad.

The first petition in the litany is: There is no such thing as a free market. All markets have rules, and couldn't work without them. So there's nothing wrong with government intervention in markets. That's crazy. All police forces have corrupt officers, but that doesn't mean we should have more corruption. It's true that markets only work if people respect certain rules – the basic rules of property, honesty and contract, which are happily agreed on by market participants. Government intervention beyond that is usually counter-productive (like the vote-seeking price controls now being canvassed in energy: remember the California blackouts, and invest in candles).

The second is: The British government debt was much higher, as a percentage of GDP, after the Second World War. And we paid that off. So don't worry about adding to the debt either. Hmmm. It took us 50 years to pay off all that debt. And at least it bought us victory over Nazism. All we have to show for today's borrowing is a bigger government and a few dud banks. And Britain's GDP was pretty shot after the War, making the debt a much higher percentage of it. Today's £1.16 trillion is no mean debt – and even that is just the official figure. Add in pension liabilities and all the rest and it is six times that. Affordable? Not if we keep adding to it as we're doing, and less so if and when interest rates rise. It's a dangerous risk.

The third is: Big-government countries like France grow just as fast as small-government countries like Britain. So we shouldn't worry about growing government either. Oh yes we should. There won't be much business done without defence, justice, so countries with some government spending on these things grow faster. But too much, and growth is damaged. It's called the Rahn Curve. A 2009 study of 15 EU countries put the sweet spot at about 30% of GDP. A 2008 study of 21 OECD countries found that higher taxes reduced growth. A 2011 report on 145 countries over half a century found that a 1% of GDP tax rise cut private investment and consumption by twice that amount. Andrew Sentance of PwC found that a cut in taxes produced growth and inward investment. And so on. Keynes himself thought the sweet spot was government spending no higher than 25% of GDP. Ours today is twice that. Cambridge economists please note.

And another thing

Oh, and one last thing that Michael Kitson told us the other day, and which Cambridge economists go on about. It runs roughly: Adam Smith only mentioned the 'invisible hand' once in The Wealth of Nations'. That means it obviously wasn't a big thing for him. So stop going on about it as if it explains everything. This again is utterly wrong. And not just because Smith mentioned it earlier, in The Theory of Moral Sentiments – or that it appears slap in the middle of both, which some folk think is significant.

No: in neither case does it really mean quite what we use it to mean today. But read The Wealth of Nations. Even if Smith never mentioned the 'invisible hand' even once, there is no escaping the fact that this is what the whole book is about. It is about people pursuing their own self-interest and as a result – without specifically intending to – benefiting others too. After all, nobody would voluntarily enter into an exchange unless they thought they would benefit from it. Market exchange benefits both sides in the deal. Government regulation, price-fixing or outright bans on trading eat into that benefit. Such intervention comes at a cost.

Why have bureaucrats when markets already solve problems?

An interesting little snippet of news from the colonies:

Tonight in New York City, CEO John Legere said that the network is expanding home data coverage for Simple Choice customers to include more than 100 countries -- from Anguilla to Vietnam-- at no additional charge. Voice calls, meanwhile, will cost 20 cents per minutes in those same countries. "Wherever, Whenever," right? The new global data offering will go into effect starting October 31st, and T-Mobile says customers with qualifying plans won't need to sign up or pay a fee to access basic service. Legere declined to detail free speeds, but we'd expect 2G performance -- enough to use text-based apps like Twitter and email, but insufficient for media consumption.

For those of you who don't grok techspeak, that's the company announcing the end of data and call roaming. The idea that you should get charged a fortune if you leave the country where you normally reside. All done purely by market forces: they think that some customers will like this, like this enough that they will switch over to this provider and that they will therefore make more money.

Then we have events on this side of the Pond:

Neelie's plan is to get rid roaming charges across Europe by forcing operators to scrape them altogether, or offer customers the almost-impractical option of an Alternative Roaming Partner, but operators won't give up on their revenue stream so easily and are lobbying to water down the legislation before it goes to the vote. Speaking at the FT-sponsored Summit in Brussels, the unelected VP of the European Commission, told operators that the Net Neutrality and roaming-free legislation would increase investment and drive innovation, despite temporarily hitting profit margins.

Yes, the bureaucrat is going to insist, by law, that the companies must do what we can already see free market competition will bring if only the bureaucrats let it.

Which brings me to one of my suspicions about all politics and politicians. When they're being the most vehement about how something must be done it's usually because they know that whatever it is is going to happen with or without their intervention. They must therefore intervene otherwise how would they be able to claim credit for it happening, or even how could they, sans intervention, show us all how necessary they are?

Royal Mail privatisation shares not too cheap

Around 700,000 people have applied for shares in Royal Mail, the letters and parcels business being sold off by the British government. This means that the share issue is around seven times oversubscribed, leading to calls that the government has sold the enterprise 'too cheaply'.

No, they haven't. You cannot win the politics of a privatisation sale. If you price the shares too high and nobody wants them, then the sale is a 'failure'. If you price the shares too cheaply, critics complain that the 'family silver' is being sold off at scrap rates.

It's nonsense, of course. After decades of practice, Britain and the world now knows how to organise privatisation sales. For a start, you get the financial institutions to underwrite the offer. You fix a reasonable price for the company, and get the institutions to agree to pick up any unsold shares at that price. So if for some reason the public do not subscribe for the shares, the institutions give you the money anyway. That is hardly a 'failure'. It just means that the institutions – who hold funds and investments on behalf of the public, their customers – buy the shares rather than the public directly.

If you pitch a privatisation share issue at a price which commentators think is a bargain, however, then huge numbers of people will scramble to get into that bargain. When newspaper and broadcast reports by respected analysts agree that the shares are likely to open higher than what people are being asked to pay for them, then it is perfectly rational for people to rush out and buy them, expecting an instant profit. That of course feeds on itself – like the 'must have' Christmas toy, which is only 'must have' because so many people want it that supplies run out, making it even more desirable. In privatisation sales, as more and more people bid, the prospect of buyers making a profit becomes more and more certain – so more and more of them subscribe.

Again, we have learnt how to deal with this. To overcome the political objection that rich folks are buying thousands of shares in order to turn a quick buck, we simply scale back people's allocation depending on the number of shares they requested. So everyone who asked for the minimum gets it, while people who ordered a great many shares will get less, or even none at all (which may be the case for those who have requested more than £10,000 worth of Royal Mail shares. So buyers have to 'game' it – working out what the likely demand might be and what allocation they might end up with if they subscribed differing amounts.

And remember that we never privatise the whole company at once. When the shares have been trading for a while, the government will know precisely at what price to unload the rest, maximising the potential yield. Clever, eh?

The government should sell off £40bn of assets, says new Adam Smith Institute report

• The government owns around £600bn of assets, many of which do not need to be in the public sector
• A sale of less than a tenth of those holdings—the most peripheral and surplus items, including £23bn of real estate—would net £40bn to cut taxes temporarily or pay down the debt
• Holding onto given assets regardless of price is inefficient on a basic level; valuable assets are best allocated by the market

The government could fund temporary tax cuts worth £40bn or reduce the national debt by the same amount by selling off a fraction of its assets, according to a new Adam Smith Institute paper released today (Thursday October 10th). The report, Cash in the Attic, shows the huge windfall that could be realised by releasing state-owned real estate and firms into the private sector. The government is estimated to own around £600bn of assets.

The report’s author, investment analyst and Adam Smith Institute senior fellow Nigel Hawkins, details how the government could bring in around £23bn from sales of excess real estate holdings and around £17bn from privatisations (excluding the bank stakes) by 2017-18.The report argues that useful resources are languishing in the public sector with no market assessment of their use to society.

Furthermore, the just-beginning re-privatisation of Lloyds TSB, as well as the sales of Royal Bank of Scotland, the government's stake in Urenco, and the Royal Mail, need to be a top priority, Hawkins says. The government should also part with a minority stake in Network Rail to raise around £7bn while still retaining control of the company.

Divestment of the Ministry of Defence’s estate would be another profitable area. Even a very limited approach to defence land sell-offs could raise £3bn, Hawkins says. In health, selling just 10% of Primary Care Trust assets would bring in £500m.

Along with these sales, agencies that already have plans to divest government assets—the Government Property Unity (GPU) and Defence Infrastructure Organisation (DIO) need to be pressured to meet their targets, the report argues.

Sam Bowman, Research Director of the Adam Smith Institute, said: “The government is sitting on hugely valuable resources that it should sell. The Royal Mail privatization is a good start, but going further would be win-win. Sell-offs of real estate and privatization of firms that the government doesn’t need to own would allow those resources to be used more productively by the private sector and net the Treasury some much-needed cash to fund temporary tax cuts to stimulate investment and job creation in the private sector.

“The £40bn of assets that we have identified as being ready for sale are just the tip of the iceberg. We need a slim, efficient government that is as cost-conscious as any business would be. It might be too soon to start planning to move government buildings to an industrial estate in Slough, but that’s what we should be aiming for.”

Read this report.

Let's smash a cartel today

I've pointed out here before that parts of the fertiliser industry seem to be run as a cartel. Now we've evidence that much of the fertiliser industry is run as a cartel.

C. Robert Taylor and Diana L. Moss have written "The Fertilizer Oligopoly: The Case for Antitrust Enforcement," as a monograph for the American Antitrust Institute. Those looking for examples of possibly anticompetitive behavior, whether for classroom examples or for other settings, will find the argument intriguing.

The effect of which is:

Taylor and Moss write: "Damages from supra-competitive pricing of fertilizer likely amount to tens of billions of dollars annually, the direct effects of which are felt by farmers and ranchers. But consumers all over the world suffer indirectly from cartelization of the fertilizer industry through higher food prices, particularly low income and subsistence demographics. ... [I]t is clear that corporate and political control of essential plant nutrients may be one of the most severe competition issues facing national economies today."

Part of the detail of how the cartel works is that it is not allowed to affect domestic US prices (Ho ho). So therefore the richest farmers in the world are not affected: but all of the poor world ones are. And I rather hope that you would be as disgusted as I am at this rent seeking and regulatory capture. For really, it's just not on to be rooking the poor farmers of the world to enrich a few companies and their shareholders. The price of fertiliser is, for those poorest of the poor, something that makes a difference to one or two meals a day. Allowing some to profit from artificially raising this price is, in my little moral universe of course, vile.

And of course it's also violating that Smithian point that the purpose of all production is consumption, we should only pay attention to the interests of the producer in so far as they are vital for said consumer. Thus smash the cartel and make those poor world farmers richer by those tens of billions a year. Sounds like a plan.

Except, of course, that's not what is actually done:

There was some bad news for York Potash project developer Sirius Minerals last week, after approval of its mine was delayed yet again, causing the shares to plunge.

Yes, that's right, the British Government will not allow a new entrant into this fertiliser market because there would be no market for the production. Even when we know that it's a cartel making super-normal profits.

I'm sure that someone tried to offer us "joined up government" a few years back. Whatever the hell happened to that idea?

Why we've finally joined Google+

We've set up an Adam Smith Institute page on Google+, and — more importantly — a Google+ community for libertarians and classical liberals (and fellow-travellers) to share and discuss ideas and articles they find interesting.

To be honest, I've always been pretty sceptical about Google+. Though I think the functionality is superior to Facebook, it's not better enough to entice people to use it instead. And we have so many fans on Facebook and Twitter that I've always been wary about splitting the audience too much.

So why the change of heart? Two reasons. One, we've wanted to set up a forum for liberty-minded people in the UK to talk about things online for a while. Message boards are unwieldy, and the other social media sites aren't very good at allowing people other than page managers or prominent Tweeters to start discussions that go out to larger audiences. Google+'s communities are remarkably bottom-up: if you want to start a conversation about something in the group, you can.

The second reason is the thing I'm most excited about. Google+'s Hangouts functionality is superb. Hangouts allow us to broadcast live video conversations between up to eight users, with chat contributions from anyone else who wants to take part. The Real Asset Company has done this to great effect. I'm hoping that, if there's enough interest, we can start doing regular online conversations with all sorts of people who it wouldn't be easy to bring to events at the Institute, broadcasting to all the people who can't make it to those events.

If there's anyone you think we should ask to 'Hangout' with, let me know in the comments and we'll see what we can do. In the meantime, join the Google+ community and let's try to get the ball rolling.

The desperate horrors of wealth inequality

Yes, we've another bunch of bedwetters and handwringers telling us how appalling it is that Britain is so unequal. This time it's about wealth inequality. It's just absolutely terrible about how unequal it all is. Here at The Guardian, at the "Inequality Briefing" site and I'm afraid that it's actually out and out nonsense. Entire tripe. Their information comes from this ONS paper and I'm afraid that they've not understood the caveats that accompany that research as well as making one other entirely silly mistake.

This is, in fact, all very reminiscent of the Hills Report that I shouted about some time ago.

The first and simplest mistake they make is that they forget that wealth changes sigificantly over the lifecycle. Indeed, what with things like university fees we rather expect people to have significant negative wealth for some years of their life. Certainly we expect that to be the general experience, that for some years people will have debts larger than their financial (but not their newly enhanced human capital wealth) wealth. It's also missing the other end of the life cycle part. 30 to 35 years after that period of negative wealth if all has gone well in that career in earlobe tattooing then we'd expect you to have paid off your mortgage and built up a nice little nest egg to finance your pension in your golden years. We really don't expect the newly graduated arts student to have either of those things. But we would rather hope that someone on the cusp of retirement would.

And that is in fact the major reason for the wealth imbalance. In those ONS figures we see that the total wealth they're talking about is around £10 trillion: of which £3.5 trillion is property and £4.7 trillion private pension plans. Financial and physical wealth are around a £ trillion each. I'm very much unconvinced that inequality of wealth across age is something to get worried about. Indeed, I think it not just normal but desirable. Another way to put this is the thought that people paying off their mortgages and saving for a pension just isn't something to bring the rabble out onto the streets.

The second problem is that they're committing what has been named (although not by me I hasten to add) Worstall's Fallacy. They are looking at this distribution of wealth before the various things that we do to reduce the inequality of the distribution of wealth. They do not count the State pension as wealth: even though it is very much an inflation proofed annuity just like the one you buy with your private pension pot. They count the house that you own but not the subsidised lifetime tenancies available in the council and social sector. That the NHS will treat you whenever you fall ill (OK, perhaps 4 weeks afterwards but....) is also a form of wealth, so is the social insurance that the State offers. In short, we've a welfare state and that is a source of wealth.

Whether that welfare state actually has the value that it costs to provide is another matter of course: but it is most certainly wealth: otherwise, why in hell does anyone support providing it?

In short, Inequality Briefing has ignored the most basic reason why wealth inequality is as it is: that people pay off mortgages and save for their pensions. And not only that they've looked at only the raw figures, without noting what is done to reduce wealth inequality.

This deserves an F minus. Go back and do it again and do it properly this time.

A new governing paradigm—maximising national wealth

How should governments decide on policy? One answer is that policy should follow a particular ideology, such as libertarianism or socialism. Another answer—direct democracy—is that policies should be arrayed in front of the populace at large so they can pick. Another is that the people at large should choose people who vote on policies from options selected by a third group of people—roughly the Westminster system. Absolute monarchy would give a family and their descendants control of policy. But an under-considered method of choosing policy is via markets.

Here I don't mean getting rid of social democracy and having most or all goods provided by the market; instead I mean choosing policies—whether free market or interventionist, right- or left-wing—with respect to the result of a hypothetical prediction market, specifically, one looking at some measure of national wealth.

Why wealth? Well what we really want to do is make people have better lives—increase their well-being. But measuring well-being directly is controversial and difficult. The two leading theories of well-being are that well-being consists in happiness/pleasure and that well-being consists in satisfying one's desires or preferences. We know wealth makes people happier, particularly when they are poor, but even when they are already well-off, and we know more wealth means more ability to satisfy most different preferences.

Thankfully, both measures (like the official ONS statistic) and proxies (like the total market capitalisation of, FTSE All-Share firms, which make up 98% of total business wealth) of wealth are fairly widely available. Of course, these happen after the fact—so while we could easily judge past governments by their effects on these metrics, we couldn't judge current policy proposals. But that needn't hold us back! We already have markets in future RPI inflation in the UK (and CPI inflation in the US), called TIPS spreads. These take the price differential between RPI-linked and regular gilts or T-bills to work out what the market expects inflation will turn out to be. We know this because if it didn't represent the market opinion, then traders could buy and sell bonds to achieve a higher expected return (i.e. take arbitrage opportunities).

Even a simple, TIPS-like market in national wealth would help us rationally guide policy. It's not exactly clear whether central banks check TIPS markets, but if they did, the markets would give them advance guidance on whether their policy would help them hit their target level of inflation, based on reactions to policy changes, suggestive speeches, and explicit forward guidance like the Carney or Evans rules. In the same way, important policies would shift the wealth markets, and governments could use that as evidence for doubling down on wealth creating policies and for getting out of wealth-destroying moves.

However there are important distinctions between the Bank of England's role in stabilising the nominal side of the economy, and the government's role in making policy that makes it likely that lots of real wealth is generated. The best nominal policies, like NGDPLT, focus on stabilising, or ensuring the stable growth of, some nominal variable. The optimal result is extremely reliable stable growth. But that's not what we want in real wealth. When it comes to real wealth, the more the better. That a policy boosted the markets' expectations of national wealth by 10% in five years would not prove it was an optimal, or even good policy, if there was an alternative that could boost wealth by 50%.

So when it comes to national wealth we need conditional prediction markets. We need markets that tell us what would happen if we implemented a given policy. The specifics of implementing these sorts of markets become quite complex and difficult, as we do not want to restrict the policy choice too much, but it may also not be practicable to open up a gilt market for every permutation of every major political idea. But if we could start conditional prediction markets up, we'd have a range of policy options with very interesting and suggestive evidence of what is best for the country's social welfare.

I think there are some persuasive objections to the results of these markets, and—further—to running policy in any rigidly-linked way to these markets. But I also think they can all be plausibly dealt with, and I will attempt to do so in a blog post tomorrow.

Making the wrong argument about supermarket cashiers

Farhad Manjoo makes a valiant attempt to insist that supermarket cashiers aren't going to be out of a job any time soon. So what's with all those self-checkout things then?

In a recent research paper called "Dancing With Robots," the economists Frank Levy and Richard Murnane point out that computers replace human workers only when machines meet two key conditions. First, the information necessary to carry out the task must be put in a form that computers can understand, and second, the job must be routine enough that it can be expressed in a series of rules. Supermarket checkout machines meet the second of these conditions, but they fail on the first.

They lack proper information to do the job a human would do. To put it another way: They can't tell shiitakes from Shinola. Instead of identifying your produce, the machine asks you, the customer, to type in a code for every leafy green in your cart. Many times you'll have to look up the code in an on-screen directory. If a human checker asked you to remind him what that bunch of the oblong yellow fruit in your basket was, you'd ask to see his boss. This deficiency extends far beyond the checkout lane.

All of this is entirely true and also very near irrelevant. Because employers are not in fact looking at the best way of doing something. They're looking at the most productive way of doing something.

And most productive depends, in this case at least, on two things. What are the costs of the different ways of doing the check out and, much more importantly, who is bearing those costs?

Let's imagine that the machines cost the supermarket less than the cashiers. That certainly sounds about right: technology has marched on and those systems, I would guess, would be cheaper than several years wages for enough cashiers to cover all of the shifts. Therefore the supermarket is going to be installing more machines. And it doesn't actually matter to the supermarket if the machines aren't as "good" as cashiers.

For here "good" is a function of how much time it takes to complete the task. And by getting us to line up at the machines the supermarket has made that time a cost that it isn't carrying. Instead, it's us the customers who are carrying that cost. It's an externality to the sums the supermarket does, is not included in hte numbers they face. The machines may well be a worse deal for us, the consumers, but a better one for the supermarket, the producer. All of which means they're going to keep installing those machines because their incentives are to do so.

What they're really doing with the limitations on political party funding

There is, as we all know, a move afoot to try and ban the spending of large sums of private money on the pursuit of politicas. Specfically, on the donation of large sums of money to a political party. We will then be forced to cough up for the poltroons through our tax bills rather than in a voluntary manner by our donations. This, in itself, is good enough reason to condemn the proposals.

But Don Boudreaux points out what makes it all very much worse. It isn't just about making, say, Labour less beholden to the unions. It's about creating a cartel:

If executives for profitable and established companies such as Apple and Wal-Mart persuaded Congress to cap the amounts that banks, venture capitalists, rich uncles, and other financiers may invest in private firms, including upstarts, this restriction would be widely seen as an anti-competitive and unjust scheme to stymie economic competition. New rivals would be disproportionately bridled in acquiring the means – money – to buy the inputs necessary for competing successfully against incumbent firms.

This is what is being proposed here in the UK. Instead of people deciding they might want to give some money to a politician or political party they'd like to support the money will be doled out from the State. One the basis of previous election support, obviously. Meaning that there's a very large barrier put in place against the rise of a new political party.

It is, quite simply, the creation of a cartel.

One other point that Boudreaux alludes to. Let's say your a staunch Labour guy and you're outraged by the way that the Big Business money flows to the Tories. The way to stop this is to change the incentives for Big Business. Strip the government, the State, of the ability to create rent seeking opportunities and no business would ever bother to buy a politician. For the politician wouldn't be able to create that super-profit for the business in return.

Or as I would put the solution. Don't stop people from buying politics, stop them from being interested in purchasing politics.