Why the answer is a carbon tax and not carbon credits

Back a decade we here at the ASI were mulling through the implications of the Stern Review and associated work. We still differ over the strength of the evidence stating that disaster is imminent. But our views on how to deal with it all assuming the evidence is true have converged. Some of us were in favour of carbon permits, trade in them across countries and industries, for such markets would be a most efficient manner of gaining the cheapest reductions in emissions quickly. Others of us preferred a carbon tax. Essentially on the grounds that while in theory less efficient the intervention of the necessary bureaucracy would make the cap and trade systems less efficient after all.

Here we show that all projects abating HFC-23 and SF6 under the Kyoto Protocol’s Joint Implementation mechanism in Russia increased waste gas generation to unprecedented levels once they could generate credits from producing more waste gas. Our results suggest that perverse incentives can substantially undermine the environmental integrity of project-based mechanisms and that adequate regulatory oversight is crucial. Our findings are critical for mechanisms in both national jurisdictions and under international agreements.

So we are, assuming the evidence insisting upon action is robust, rather of the view that the tax route is better.

Centralisers don't get it: We're all planners!

Unless you live a solitary life on a forgotten island, it seems likely that decisions you make will impact upon others. Decisions about what to buy and sell, which causes to support, which groups to join, which friends to make, and which things to say, all constitute the actual form of society. The fallacy of the central planner is to believe that none of this could happen effectively without their interference. The debate, therefore, is as to what kind of society we ought to live in; a bottom-up society of individuals voluntarily cooperating, or a "strategically planned" society with fundamental parts of our lives influenced by social science experts.

While the "invisible hand" explains the behavioural forces that make a free society possible, the advantage of dynamic planning as system over a system of state control is infrequently made. The free society acts as a total nexus between all agents, retaining all the information of how people act, and, indirectly what people want. Though it lacks a mind to process or plan, the ripple effects of our decisions change the system and society as a whole, whether through changes in prices and production, our personal relationships or through cultural memes. No central planner, no computer and no expert can comprehend the complexity of the organic society they wish to reorder, nor can the information held in bit pieces by individuals be reduced and aggregated to guide the planner as to our wants. The paradox is that the brightest and best intentioned officials are routinely outsmarted by ordinary people managing small projects, precisely because the system of free association has no calculating centre or mind to overrule the genuine needs and desires of individuals to plan for themselves. Going forward, it is necessary to accept that a network of ordinary people has more collective intelligence than any committee of even the super bright.

Even indicative planning assumes that authority knows best how to arrange our lives, and, as with the holiday companion who insists on planning every minute of your day around their own interests, this engineering of persons soon becomes tiresome. Yet the stifling conceit of strategic planning can be replaced with a decentralised model. As everyone is different, finding satisfaction in colours of life specific to their person, our approach to others must recognise human beings as ends in themselves, and respect that their own path to happiness may not be the same as our own.

Localised actors, whether individuals, companies or governments can act based on better knowledge of their own specific problems, and provide solutions that are diverse and flexible. The inflexibility of the standardised national plan is its fragility, for whatever its political imperative, compounded errors induced by poor information impact on the grand scale. The utopian thinker should remember "small is beautiful", and be content to respect the authentic wishes and plans of people as they are.

The real problem with Corbynomics and Peoples' QE

There's a number of problems with this idea central to Corbynomics, this Peoples' Quantitative Easing. It's illegal for a start, being simply monetisation of fiscal policy. It won't work as planned simply because any independent central bank would alter other monetary policy so as to accommodate the change. It's not possible to remove central bank independence because that is again illegal under EU law. And of course there's the killer blow, which is that it was designed by Richard Murphy. We therefore know that it is wrong, we just have to work out why in this particular instance. Allister Heath points to another problem, one that has been occurring to us too:

... financed by “People’s QE”, another of Corbyn’s idiotic schemes. The Bank of England would restart its quantitative easing (QE) programme but instead of buying gilts, newly-minted money would be spent on government infrastructure programmes.

Down that road lies catastrophe: monetising public spending, by eliminating the Government’s budget constraint, frees politicians from the restraints of reality. But the escapism is only ever temporary. If enough money was printed, inflation would make a comeback.

Murphy's answer to this idea that simple monetisation of fiscal policy would increase inflation is to insist that we are all missing the importance of taxation. Yes, true, increasing the money supply would, ceteris paribus, increase inflation. But government could then reduce aggregate demand by increasing taxation. So, there, you see, it all works!

At which point we wonder why the use of the magic money tree in the first place. The end result will be that, to erase the effect upon inflation of the increase in money, taxes will rise. That is, there's no difference here between PQE and the more traditional tax the heck out of the population and get to spend it all on lovely things.

We also have another worry. Which is that we all know that politicians like spending our money like those drunken sailors on shore leave. But the insistence that there's at least some, occasional, relationship between how much they gouge out of us and how much they spend does produce some limit on their profligacy. Remove that limit and let them print whatever they like and, then ask them to raise taxes to stop the resultant inflation. Well, who does believe that inflation will be a sufficient reason for them to raise taxes sufficiently? It's not exactly what has happened anywhere else government has resorted to the magic money tree, is it?

Another societal mass delusion, this time about sugar

Yes, yes, we know, we're all becoming gross lardybums because Big Food insists on feeding us masses of sugar. And there should be regulation, banning, taxation, anything, to save us from exploding as we gain ever more weight and fat as we gorge. We know this must be true because the nation's favourite cheeky chappie, Jamie Oliver, is telling us so:

If anything, Oliver’s proposed 20% tax on sugary drinks is a pretty modest gesture (it’s hardly the end of pudding as we know it – he’s not asking for anything to be banned), but still it attracts the frothing rage of libertarians and the resistance of industry lobbyists. Oliver’s been there before, of course. But the extra twist is that this row increasingly pits parents against everyone else.

The argument for taxing or otherwise regulating the white stuff is almost always framed as saving the kiddies from an untimely death (Oliver says he was inspired by seeing his own four bombarded with fizzy-drink ads while watching telly). But what separates this war on Big Sugar from his school dinners project, or even from sin taxes on age-restricted products like booze and fags, is that there’s no way of weaning children off sugar without also affecting adult diets. And many grown-ups respond to that with all the fury of toddlers denied a biscuit.

Yet the real problem here is that absolutely none of this diagnosis is actually true. we're not eating more than our forefathers did, we're not even eating more sugar than our forefathers did. We are, in fact, consuming less of both than our ancestors did, even that we did ourselves only a few years ago. As Chris Snowdon has pointed out:

All the evidence indicates that per capita consumption of sugar, salt, fat and calories has been falling in Britain for decades. Per capita sugar consumption has fallen by 16 per cent since 1992 and per capita calorie consumption has fallen by 21 per cent since 1974.

If calories consumed have been falling then it cannot be a rise in calories consumed that is making us all lardybuckets. If sugar consumption is down if cannot be sugar consumption which is making us all grossly fat. It must, obviously, be something else. That something else being that calories expended has fallen faster than calories consumed. Perhaps the largest influence on this has been the general introduction of full on central heating in recent decades. After all, we are mammals and the major energy use in mammals is the regulation of body temperatures.

One more little factoid on this: the current average UK diet has fewer calories than the minimum acceptable diet under WWII rationing. Quite seriously: we are gaining weight on fewer calories than our grandparents lost weight on.

And thus as a society we find ourselves in one of those madness and delusions of crowds events. These are not restricted to markets gone haywire, like the idea that American house prices could only ever rise, or that tech stocks could be day traded to a fortune. They can be rather more societal in nature: think witch burning or the much more recent Satanic abuse mythology. And we are now in the middle of another one about sugar.

It simply isn't true that we are eating more of it, nor that we are consuming more calories in general. Thus the solution to our generally getting fatter just isn't related to our consuming more of what we don't in fact consume more of.

Let them in

In City AM today I have a piece on the refugee crisis, arguing that the costs that many are (understandably) worried about may not actually be a problem:

A recent study looked at the impact of Yugoslav refugees on Danish workers in the 1990s and 2000s. Because Denmark’s resettlement policy distributed these refugees across the country without respect to local labour market conditions, this is a case study in how “exogenous” immigration affects natives. . .

Instead of starting a race to the bottom, as some feared, this influx of workers allowed the Danish economy to become more complex. Adam Smith’s “division of labour” increased, as jobs became more specialised and hence more productive. . .

Crime is on people’s minds too. And it’s true that asylum seekers do seem to increase property crime rates in the places in Britain they go to, though interestingly they seem to reduce violent crime rates.

But this seems to be a consequence of the tight restrictions that effectively prohibit asylum seekers from working for at least the first 12 months that they spend in Britain. If we liberalised those rules, we could solve that problem.

It's important to get the numbers right. The UK has accepted around 5,000 asylum applications from Syrians, not 216 as many people are claiming – that 216 is the number of Syrians we've actually evacuated from Syria directly. But I think there's a strong case for letting in many more than that.

A brief endorsement of 'Markets for Managers'

I'm often asked by people who are just getting interested in economics what they should read. There is no shortage of good 'pop economics' books to recommend to them: Freakonomics is the most famous and The Armchair Economist is enjoyably contrarian, but for my money The Undercover Economist is the most interesting. But none of these teach you the sort of economics you'd learn if you studied economics at a university. And that's where Anthony J Evans's Markets for Managers comes in. It's aimed at 'managers', by which Evans means people who make strategic decisions for their firm, and makes the case that managers who understand the principles of economics will have an advantage over their rivals. But in explaining those principles Evans inadvertently gives an introduction to anyone who wants to learn about them.

The 'applied economics' method that Evans uses is extremely readable. If, like me, you prefer to learn by applying abstract ideas to reality, Evans's approach is ideal. And for British audiences there is something quite nice about reading examples applied to Fernando Torres rather than basketball players I've never heard of. What's most impressive about the book is that Evans even covers the drier parts of economics, like international trade and macroeconomic policy, that the 'pop economics' books don't bother with.

Evans is a Senior Fellow of the ASI and can claim to be one of the UK's only "Austrian school" economists, and these perspectives do shine through, though not to the detriment of the economics being discussed. What he's done with Markets for Managers is to give a clear, interesting and comprehensive primer in economics as it's taught in the classroom. No doubt many managers would benefit from reading it but even more so I find myself recommending it to university students who are not studying economics. For historians and political science students especially, the boot-camp in economics it gives might well give a surprising new way of understanding their own fields.

Markets for Managers at Amazon.co.uk

Markets for Managers at Amazon.com

So that's the end of minimum pricing on booze then

Ever since the idea was first put forward we, along with others, have been saying that minimum pricing for booze would fall afoul of the law. And we were right:

Nicola Sturgeon’s plans to fix a minimum price for alcohol has suffered a huge blow after the European court’s top lawyer ruled it would infringe EU law on free trade.

In a formal opinion on Sturgeon’s flagship policy, the advocate general to the European court of justice, Yves Bot, has said fixing a legal price for all alcoholic drinks could only be justified to protect public health if no other mechanism, such as tax increases, could be found.

Bot’s opinion is expected to mean a final defeat for the Scottish government’s efforts to be the first in Europe to introduce minimum pricing – supported by leading figures in the medical profession and the police, after several years of legal battles.

Over and above the obvious illegality of the proposal the thing we couldn't get our heads around was the mind gargling stupidity of the idea. We don't accept the idea that boozers don't cover their costs currently but imagine, for a moment, that we do. Why, as a solution, would you boost the profit margins of producers with a minimum price rather than raise the prices with more taxation? We have not been able to find anyone who can explain this to us.

All we're left with is the rather uncharitable opinion that some people wanted nice jobs as campaigners but wanted to make sure that they campaigned for something silly that quite obviously would never happen. Nothing, other than sheer raging stupidity, makes sense as an explanation to us.

Economic development can have some old, old, roots

An interesting little piece of research showing just quite how old some of the roots of economic prosperity can be. And shown using the most modern technology as well. For some years now economists have been measuring economic development by the amount of light that can be seen in satellite photographs of an area. For one of the very first things people seem to do, as soon as they can, is to light up that bulb rather than curse against the darkness. The technique has been used to estimate African GDP growth for example, coming to much more cheering results than the official figures would have us believe. And here it's used to measure quite how old some of the roots of successful development might be:

In ancient times, the area of contemporary Germany was divided into a Roman and non-Roman part. The study uses this division to test whether the formerly Roman part of Germany show a higher nightlight luminosity than the non-Roman part. This is done by using the Limes wall as geographical discontinuity in a regression discontinuity design framework. The results indicate that economic development—as measured by luminosity—is indeed significantly and robustly larger in the formerly Roman parts of Germany. The study identifies the persistence of the Roman road network until the present as an important factor causing this development advantage of the formerly Roman part of Germany both by fostering city growth and by allowing for a denser road network.

It's a very interesting little piece of work.

Why are corporations 'socially responsible'

In a 1970 piece in the New York Times magazine Milton Friedman argued that 'the social responsibility of business is to increase its profits'. They should make as much cash as possible for their shareholders, and shareholders should give directly to charity. It is hard enough to be an efficient firm, without needing to be an effective charity at the same time. But it is popularly believed that corporations' role in society does include various other responsibilities rather than simply maximising long term shareholder value. And in real life we note that firms often run charity events, match their employees' charitable donations and so on. Why would firms spend money on charity when they don't have to?

At first you might expect that managers are exploiting the firm to selfishly gain themselves prestige. There is some evidence, for example, that more narcissistic chief executives do more corporate social responsibility.

But the bulk of evidence suggests that firms do better financially when their 'corporate social performance' is higher. A 2003 meta-analysis of 52 papers and  33,878 firms found a positive association—though this was stronger when you measured financial performance by accounting measures rather than investor measures. A 2007 meta-analysis looked at 167 studies and found a similar result: corporate social responsibility is associated with higher financial performance, though quite weakly.

Various different types of study confirm this point from different angles. For example, a 1997 paper looked only at 27 event studies of share prices when firms revealed socially irresponsible behaviour and found the converse of the other results: bad behaviour cut firm value. Event studies on financial markets are quite a good way of isolating causality; with a short enough timescale the change in question is very likely to be the one driving price changes.

But why exactly does CSR help firm performance? Recent work provides some clues. For one, it seems to cut a firm's financial risk. It seems to raise a firm's access to capital. This might be why market analysts tend to recommend firms more in their notes after they engage in CSR. And it explains why firms with more shareholder-driven corporate governance give more incentives to CEOs to engage in CSR—not what you'd predict if it was an agency cost.

This probably comes from reputational improvements, and reputational insurance. Customers prefer to buy from firms who do more and better social programmes, and engaging in CSR seems to cushion stock declines after ethics in business become popularly salient (e.g. after the 1999 Seattle protests against the WTO).

Intriguingly, the reputational advantages may also extend to the government. Davis et al. (2015) discovers that firms who do more nice stuff also lobby more and pay less tax; i.e. that corporate social responsibility and tax are substitutes. This suggests that CSR overall is not driven simply by some measure of manager altruism or empathy or quality—the sort of thing we might usually wonder about. (Though some evidence disagrees.)

None of this really answers whether CSR is good for society at large. If it does enhance reputation, leading consumers to like it more, then this is basically a transfer from consumers to charities. Either way we probably shouldn't lionise firms when they do it—they're just trying to maximise profits, as usual.

There's silly housing policies and then there's stupid ones

We'll leave it to you to work out which one this is, silly or stupid:

Londoners should be given the chance to buy a new type of state-built, price-capped home that could only ever be sold to a first-time buyer, according to David Lammy, a Labour mayoral candidate.

Announcing new details of his plans to address the housing crisis in the capital on Monday, Lammy said his plan would create a new type of tenure in the UK housing market and see the state showing “hands-on leadership” in housing.

Lammy, one of the six contenders hoping to be named as Labour’s candidate for mayor in the 2016 election, said he wanted to build 30,000 of what he described as new “first-time homes” with the intention they would provide affordable housing for Londoners for generations to come.

The homes, which he said could be available for as little as £150,000, would be built on public land and sold with conditions on the leasehold intended to stop the price rising in line with normal London house price inflation.

The buyers would be able to sell for up to 10% above cost price, but only if they had lived in the home for a long time. For those trying to sell after a shorter period, the cap on the amount by which the price could rise above cost would be “significantly lower than 10%”.

Well, no, we won't leave it to you: this is a stupid policy, not merely a silly one.

There's two ways you can ration things: by price or by queues. And if you fix the price then you will be rationing by queue. Thus the inevitable outcome of this plan will be a vast waiting list of people wanting to buy this price controlled housing. The difference between this and standard housing association or council housing is only that people will be paying a mortgage to live in it rather than rent. Which isn't in fact all that much of a difference.

If there is in fact public land upon which housing can be usefully built then sure, housing should usefully be built upon that public land. But it should of course then be sold at the market price for to do otherwise means a subsidy from all other taxpayers to those who gain that below market price. That is, the politicians would just be buying votes with our money again.