For Mr. Chakrabortty: why we saved banking and aren't saving steel

Over in The Guardian Mr. Chakrabortty asks us this fascinating rhetorical question:

Why don’t we save our steelworkers, when we’ve spent billions on bankers?

There's two answers to this, neither rhetorical.

The first is that those billions we spent upon bankers, that trillion in fact, was temporary:

Imagine what would happen if manufacturing were centred around the capital, and its executives had Downing Street on speed dial. Actually, you needn’t imagine – merely remember the meltdown of 2008. Then Gordon Brown was so desperate to save the City that the IMF estimates he propped it up with £1.2 trillion of public money. That’s the equivalent of nearly £20,000 from every man, woman and child in the country doled out to bankers in direct cash, loans and taxpayer guarantees.

The vast majority of this was emergency liquidity provision, something that a central bank is supposed to do in a fractional reserve banking system. It's all been paid back, with interest. It's not made a loss, far from it, it's made a profit for the taxpayer. Yes, there's interesting arguments we can have about those residual stakes in Lloyds and RBS but it's absolutely not true that it all "cost" each taxpayer that sort of sum. That we use the central bank in a fractional reserve system to do what the central bank should do in a fractional reserve system is not in any manner an abuse of said system.

The second answer is that we actually want to continue having a financial system after that wobble of the Crash. It's not in fact true that we want to have a basic steel industry. Technology does change, there's little to no reason for rich countries to still be running blast furnaces. Which is why so many of them have closed over recent decades in those rich countries. It's not just here: even the French let the Florange furnaces close. Making basic steel is, these days, a pretty basic industry. Those parts of the British steel industry that are making the high value added products (like the higher end of the stainless steel industry) are still, as they have been all along, exporting to places like China. And this is what makes a country rich in the first place: that it concentrates on the high value added parts of production. Simply because that's how high wages can be paid, concentrating on doing things with high value added.

In a nutshell, aid to banking was a temporary measure to cover a known weakness of the system, a system we most definitely wanted to retain (try thinking about an economy with no banking system: it's to think of an economy with no economy). Aid to basic steel production, from virgin materials in those blast furnaces, would need to be permanent as it is in fact a residual technology, one that we almost certainly shouldn't be doing any more given the low value added.

If the problem were, as it was in banking, to do with short term liquidity and confidence in the steel industry then sure, why not think about covering, at a profit, that gap using the power of government and the taxpayers' funds? But if that ain't the problem then what's the justification?

We're going to have to tax middle aged women having unprotected sex

It is of course sad that we've got to make this policy suggestion, perhaps imperative is better than suggestion, but it is for the NHS you know, so it is indeed valid. We're going to have to impose a tax on middle aged women having unprotected sex. It just costs said NHS too much money:

In every year since 2006 more than 110,000 babies have been born to women in their late thirties. This is a level of births not seen since just after the Second World War, and four times the level of the late 1970s, the RCM said.

For women in their forties, births have been above 29,000 for four years in a row. These are again numbers not seen since the years after the second world war, and are almost five times the level of the late 1970s.

Cathy Warwick, RCM chief executive, said: “All women deserve the very best care, regardless of the age at which they give birth. Women have every right to give birth later in life and we support that. But typically, older women will require more care during pregnancy, and that means more midwives are needed.

Older mothers cost the NHS more money: therefore those partaking in the risky behaviour which might lead to it costing the NHS more money must be taxed.

We know that this is the correct solution: exploding livers cost the NHS money therefore alcohol must be taxed more highly, perhaps even with a minimum price as well. Lung cancer costs the NHS money therefore cigarettes must be taxed more highly. And people shouldn't be allowed to do it indoors, or in a car, or anywhere near children. Obesity costs the NHS money therefore fizzy pop must be taxed more highly. And no doubt at all, given that processed meat causes cancer now, there will be someone along to shout that bacon butties must double in price and not be eaten where children could believe that such behaviour is normalised.

Therefore, given the basic logic by which our society works, middle aged women who have unprotected sex must be taxed. For the result of this costs the NHS money. And perhaps they should be banned from doing so indoors, in front of children, in cars, and possibly a minimum price must be imposed. And definitely not in pubs where they might enjoy it with a drink.

Alternatively we could suggest that the NHS, which we pay for, is there to treat the results of how free people live their lives. But that's such a radical idea that it will never catch on, will it?

Does welfare reduce poverty?

Does welfare reduce poverty? That might seem like a stupid question. Welfare is basically giving money to the badly-off. Of course, there are lots of glitches in the system which make it less efficient and effective than it could be and limit its potential (see the ASI's latest paper for more on that). But it still targets those in need reasonably well, even if it could do better. However this may not be true for all groups. Harvard's George Borjas, among the world's experts on the economics of immigration, finds in a new working paper that in one specific case welfare did not increase recipient incomes and reduce poverty.

The Personal Responsibility and Work Opportunity Reconciliation Act of 1996, the major Clinton-era bipartisan welfare reform, slashed federal spending on welfare benefits, cutting especially immigrant eligibility for major payments. Many, but not all, states decided to cushion their immigrant populations from the blow, making this a natural experiment. We can look at the difference between immigrant populations in states that did and didn't cushion them to discover whether cutting hit those who used to get it, or whether it induced extra waged labour to make up the gap?

In practice Borjas finds that the entirety of the loss in reduced welfare benefits is made up by extra earnings from working in the labour market. In fact, more than the entirety is made up, and cutting welfare actually reduced poverty for the most-affected immigrant groups.

In Borjas's words:

The evidence presented in this paper strongly suggests that, at least in terms of officially measured poverty rates in immigrant families, the welfare state is not a panacea. For these families, welfare contributes to poverty.

Now, I am sceptical as to whether this is widely applicable. There may well be differences between immigrant groups and natives of similar socioeconomic status—for example, first generation immigrants are widely perceived as having a stronger work ethic. They may also have lower savings to run down, credit to run up, or family ties to rely upon. It may be more credible that the authorities will let them endure real economic hardship—whereas the hardship of others may be more visible and salient for voters and welfare authorities. So this finding probably does not apply to native welfare recipients.

These points are why the ASI, and myself, favour a generous but simple welfare system: the negative income tax. But the finding is certainly interesting. In at least some cases, welfare does not reduce poverty, and may even increase it.

Erm, why?

Paul Mason says something that confuses us greatly. It's as if he's never actually heard of the concept of spontaneous order:

But in a smart city, you need data to flow freely across sectors that, in the commercial world, would normally be separate. The energy system needs to know what the transport system is doing. And the whole thing needs to be run like a “God game”: the city government, not the individual, must exercise control.

This is exactly the wrong lesson to take from these new technologies. But it's that old idea again, the idea that "someone" must be in control. Someone must run the country, someone must run the economy, someone must pan and detail what people and systems must do. And we've good evidence, we normally call it the 20th century, that this isn't how to make the world function effectively.

Certainly, there need to be rules, but those that work best are simply codifications, clarifications if you will, of what people are doing already. So look to society, see what people are doing, then write down what people are doing. But the idea that there needs to be a plan, a controller, over and above this is simply wrong.

Which is rather the point of these new technologies. Yes, at our previous stage of technology it was necessary for people to plan cities to some extent. But the entire point of the new level is that we can just hand this back to voluntary interaction. There doesn't need to be a Fat Controller in a system where we can all effectively interact.

That's entirely the point. We're now able to make cities work, if we're to believe this smart city hype in the first place, as markets, not planned systems. And markets don't need that God running the game, they manage it quite happily on their own.

Free Market Welfare: The case for a Negative Income Tax

The government should replace tax credits, Jobseeker’s Allowance, the Universal Credit, and most other major welfare payments with a single Negative Income Tax, according to a new report from the Adam Smith Institute, Free Market Welfare: The case for a Negative Income Tax. This Negative Income Tax (NIT) would act as a minimum income guarantee for all British citizens and be tapered away as people’s earnings rise through work. Britain’s existing welfare programmes are costly to administer, complicated to navigate, and designed for a postwar-style labour market that no longer exists, the paper argues.

Under a Negative Income Tax, if a citizen earns nothing then the automatic NIT payment will be their entire income. As the individual earns more through work, the payment is gradually withdrawn until the citizen begins paying tax. The payment scheme is structured so that the claimant is always better off working more hours or taking higher wages than in their current position. These payments would be automatic for workers within the PAYE system.

The report says that the biggest welfare challenge future governments are likely to face is chronic in-work poverty, as globalisation and technological change lead to lower productivity and pay growth for some bottom and middle earners. This means that Britain’s current welfare system is outmoded and must be restructured to support low-wage workers throughout sustained periods of low-paid work, not just when they are out of employment altogether.

Systems like tax credits and the Universal Credit aim towards this goal, but are still too complex. Instead of a complicated web of different payments, the government should make just one, the report’s author Michael Story argues. Recipients would decide themselves how to spend their benefit, and as they earn more in wages, the benefit would be withdrawn at a rate that guarantees work always pays.

A simpler welfare mechanism like the Negative Income Tax could be integrated into the tax system, allowing the government to shut down the Department for Work and Pensions, take many of its 34,000 staff off the payrolls and save up to £6bn in administration costs.

To read the full press release, click here.

Will Hutton's quite right here, of course he is

Sure, we could have done all of these things, we could even do them now:

Britain, for example, could have had a brilliant civil nuclear industry, a vibrant aerospace sector, the fastest growing windfarm industry, clusters of hi-tech business all over the country – and a hi-tech steel industry. Instead it is no better than a mendicant subcontractor. It does not have a share stake in Airbus, while France and China are building our nuclear power stations. Our green industries, once the fastest growing in Europe, are shutting. Only banks and hedge funds are protected and nurtured in a vigorous, uncompromising industrial policy, but they don’t buy much steel. They are the “we” behind which even ultra-libertarian Sajid Javid will throw the awesome weight of the state. Scunthorpe, Redcar, Teesside and the West Midlands are not; they can go hang.

And for once the Observer's subs have got the heart of the matter correct:

There is no need for the laws of supply and demand to destroy our industries

The point is though, that while we could have done all of these things we didn't want to do all of these things nor do we want all of those things to have been done. For we actually want what is produced to be so as a result of the interplay of supply and demand.

Do not forget Adam Smith: the sole point and purpose of all production is consumption. Supply is, in a very general sense indeed, determined by the resources available and the technologies we know about to transform them. Demand is, well, that's us. And so we want what is produced, that supply within those twin constraints of resources and technology, to be determined by the accumulated desires of us all, which is that demand.

Hutton talks about both steel and football. And if it costs more to produce Accrington Stanley than people are willing to support their demand for Accrington Stanley with then it's not just that the club should close it's that we desire that the club should close, as it did. Similarly with steel: if those resources combined with that technology are a net loser to our society then we'd prefer that those resources go off and combine with some other technology to produce something that is a net addition of value to our society.

Hutton is entirely right that we can ignore both supply and demand and construct the economy according to other metrics. Perhaps the personal desires of the head of an Oxbridge college for example. But the point is that we don't want to do that. We actually desire the economy to be run on the basis of supply and demand precisely because demand is what we all want. Not, say, what the head of an Oxbridge college wants.

Of course we expected nothing different from a political statistic but still....

As we all know political statistics are not used to illuminate, rather to obfuscate. An interesting example of which is the campaign that Unite is running about the changes to tax credits. Examples of that, well, yes it is, propaganda, are here:

Teaching assistants, social workers and other key public sector workers could lose more than £1,500 a year as a result of controversial government cuts to working tax credits, according to calculations by the public sector workers union Unison.

They also provide us with a handy little calculator here. At which point we can say two interesting things about these numbers.

Firstly, they do calculate the change in post-tax income that comes from the rise in the personal allowance. But they don't actually include it in their headline number. Which is to be expected, of course it is, but still a bit sneaky.

The second is that they're only calculating the rise in the personal allowance for this one tax year. Entirely ignoring the fact that it has risen substantially over the previous years as well. Which is distinctly sneaky.

The reason we are interested in this is of course that that large, near doubling in fact, of the personal allowance came about as a result of our shouting about it. That it's simply ridiculous that those on the minimum wage, even part time on that, should be paying income tax at all. An imposition upon their incomes that is then topped up by a hand out of tax credits. The adjustment, as we all would wish it to of course, needs to come with the personal allowance rising first, then the hand out reduced. Which is what has happened and thus we would insist that the entire process is evaluated, not just the effects in just the one year.

Finally, of course, there's the one more point. We have also been advocating that the personal allowance for national insurance payments should rise to be the same as that for income tax. And, more controversially, that this should be the same as the full year, full time, minimum wage. At which point, if this were done, the current reductions in tax credits would leave all but those in the oddest of family situations no worse and possibly better off.

That is, as we've been saying all these years, the problem is not that we don't give the poor enough money, it's that we take too much off them. We do not have wage or benefits poverty in the UK, we have tax poverty.

So, as we keep saying, if you want the working poor to have more money then stop taxing them so damn much.

On entirely misunderstanding the mechanics of capitalism

We'd just like to offer our congratulations, once again, to the founder of Corbynomics, Richard Murphy. Congratulations on managing to entirely misunderstand the methods of capitalism and the implications of bankruptcy. Here he is worrying about the possibility of a system of care homes going bankrupt:

The extent of the crisis at Four Seasons, Britain’s largest care home provider, was underscored on Thursday when it appointed advisers to carry out an emergency review of its finances. And:

Four Seasons, which has 22,500 beds in 470 homes, is weighed down by annual interest payments of £50m and debts of more than £500m — meaning it is making less money than it needs to service bondholders.

So, we have another private sector out-sourcing disaster in the making impacting on an enormous number of vulnerable people and their families.

When will we realise that care of the elderly is not something for which the market has any easy solution whether it concerns care or pensions? Deep financialisation and the provision of essential social solutions just do not mix in either case. But I expect the same old excuses to be rolled out this time as in the past.

One day we might have a government with the courage to admit that this is a problem for all of us. Until the problems will keep on coming.

The potential bankruptcy of Four Seasons (we have absolutely no idea what their financial situation is at all, we're only going on the evidence provided by Murphy) is in no manner an outsourcing disaster. It may not be all that much fun for either shareholders or bondholders but it will make very little difference to anyone else, including those elderly people currently living in those homes.

For we've seen this movie before, when Southern Cross went down. Management messed up their financing, the company went bust. But the homes carried on existing, those elderly people carried on living in them, being cared for by the same staff as before. For capitalism is a system which describes who owns things. And bankruptcy is the method by which transfer of such assets (ie, care homes, contracts with people to live in them, with staff to aid them in doing so) are transferred from one group of owners who screw up to others who may do better.

As far as anyone knows there wasn't even a case of one single cup of nice hot tea not being served as a result of that Southern Cross bankruptcy. And there's not a shred of evidence that anything different will happen in any other future such event. Simply because investors who choose the wrong management lose their money. This is how it should be, this is how the system works. And bankruptcy is the process by which we ensure that it does.

Quite why the transfer of a group of assets from possibly erroneous or not very good management to that of some other group of people is a disaster we're really not sure. Perhaps Jezza, with the aid of his adviser, will be able to explain it all to us one day from the Dispatch Box.

Jamie Oliver is wrong in theory here, not just in fact

While banging the drum for his illiberal and unnecessary sugar tax, Jamie Oliver told Parliament the following:

The tax, he said, would “remind [manufacturers] who is boss. And that is child health and the government.

“We should work out who is running the country. Is it businesses – who are profiting from ill health in our country – or is it us?”

More important than the tax itself, he said, would be the message it sent that the government “is willing to fight tooth and nail for public health, and especially children’s health”.

The tax system is not a communication method. We can send messages by fax, letter, email, telephone call and there might even be the occasional telex left lying around. But tax is not a messaging system so that's not the way we send messages.

Secondly, the only people who profit from ill health in the UK are those people working in the NHS who get paid to deal with it.

But over and above all of this is the entirely mistaken theoretical view he has of the place of government. They do not, and we do not want them to, run the country. This has actually been tried of course. There have been governments which tried to determine who produced what, at what price, and then who was able to consume them and in what volume. We usually refer to such failures as Soviet style socialism. It just didn't work: neither in restricting access to the goods that were considered verboeten (for example, Gorbachev's restrictions on alcohol led to hte entire country running out of sugar as bathtub vodka was made) nor in any other conceivable measure of the Good Life.

What we do want government to do is those things which both must be done and which can only be done by government. Given that we're all entirely capable of determining whether we'd like a nice glass of fizzy pop or not, this isn't an area where we need the government's help. Thus the proposition fails, on both theoretical and empirical grounds.

Why is Mr Osborne going to wreck the best bus industry in Europe?

In London, Belfast and most European cities, buses are regulated and run by local authorities usually through a contracting model. They require very substantial public subsidy. Outside London, mainland UK buses are deregulated with private bus companies making all the decisions about when and where buses will run and what fares will be charged. They take the commercial risk. Because London has a highly developed bus lane network combined with a congestion charge, along with high population density and a growing economy, bus use has grown considerably in recent years. Despite this high use, the regulated system is so bureaucratic that London buses need a subsidy of about £600m per year. Belfast buses make large losses, but as they do not have London funding levels, they are facing big services cuts.

Outside London 90% of buses do not require any subsidy, the rest are mostly deep rural services and a few evening and Sunday services. Where local authorities are very pro-bus, usually to protect their town and city centres from congestion and pollution, or because it is impossible to provide a bigger road network, bus use is growing and companies are providing more comfortable buses with free Wi-Fi.

Places like Nottingham, Reading, Brighton, Oxford and Edinburgh have very high and growing levels of bus use. Customer satisfaction is high. Buses carry about four times as many passengers as the rail network and have the same levels of safety.

Despite the evidence, some of our bright local authority transport officers have decided that the buses are popular in London because they are regulated rather than because of the basic economic and financial situation there. For years these officers have been trying to get buses re-regulated and pass into local authority control. They have persuaded themselves, again against the evidence, that the huge costs of contracting could be met by cutting the profits of bus companies.

The outcome would be huge losses for the local authority, which would be passed on to council tax and business rate payers, along with big cuts to the bus network. Recently Sheffield City Council which had been a bellwether for regulation, changed its mind and signed up to a partnership arrangement with the bus companies. This will cost them very little, but they already have higher bus use and less congestion and better bus services for Sheffield are being delivered.

The puzzle is that in the name of devolution Mr Osborne is unnecessarily giving local authorities contracting powers (being described as franchising – but it isn’t in reality!) with a Buses Bill due to go through Parliament early next year.

A few dinosaur led local authorities such as West Yorkshire and Tyne and Wear are likely to rush into contracting, destabilising city budgets and undoing some of Mr Osborne’s attempts and deficit reduction. If they succeed there will be knock on effects for all Britain’s bus networks, even the best, because companies will no longer be able to raise capital for new buses from the private sector and quite quickly buses will become old and unreliable. Mr Osborne will have ruined one of the Conservative Party’s best privatisations!