Garett Jones vs. Bryan Caplan on immigration

Garett Jones, one of my favourite economists, has a new book out, Hive Mind, about how the IQ of your compatriots is more important in determining your life outcomes than your own IQ. Since the IQs of people in the developing world is recorded as lower than the IQs of people in the developed world, this means that mass immigration could worsen our lives by lowering average IQ, since this feeds through to lower social trust and worse institutions.

This would reduce the value of open borders as a policy regime. But Bryan Caplan, famous libertarian advocate of more liberalised migration laws, disagrees, and they debate this issue here, in what I think is a very high quality and interesting tussle.

How do we get the adults into government?

We are ever so slightly worried by this announcement:

The government is proposing a national minimum bedroom size as part of a drive to stop landlords carving up houses into ever smaller rooms to maximise rental income.

Bedrooms in houses of multiple occupation would have to be a minimum of 6.5 sq m (70 sq ft), and landords letting rooms smaller than that would be guilty of a criminal offence.

The proposal was sparked by an outcry over “rabbit hutch properties”, many costing as much as £1,000 a month, as landlords cash in on the booming housing market, particularly in London.

Lots of people wish to live in parts of the country where there are not many bedrooms. Therefore people are living in small bedrooms rather than large ones: that's just what happens. If there's a shortage of food then people eat smaller meals, if the pub runs out of beer then everyone drinks shorts. Shortages lead to smaller measures.

Government would not ban the consumption of gin if beer were to go short, government would not ban smaller plates if food were to be short, so quite why government thinks that the banning of small bedrooms is going to increase the supply of bedrooms is unknown to us.

All we're really left with is wondering how we might manage to get adults into government. You know, the people capable of doing that mature, joined up, thinking stuff?

Sadly, we're not even sure where you'd send the postcard if you did have an idea about it.

UKTI can deliver an easy quarter billion pounds

There are two schools of thought about United Kingdom Trade and Industry (UKTI), the quango intended to help UK exporters and investors inward to the UK.  Supporters say it repays its £529 million annual cost in added value for UK GDP many times over.  Critics say it is top-loaded with fat cats, ineffective and a dead weight.  It has been in operation for 30 years or so but the coalition government took such a positive view that they seriously up-scaled its budget in the light of its 2010 target to double exports to £1 trillion by the end of the decade. At that point export growth was trundling along at 3.5% p.a.  With the up-scaled UKTI what can we now expect?  You guessed it: 3.5%.  (Office for Budget Responsibility forecast).  Exports are likely to increase 33% over the 10 years to £630 billion – a far cry from the £1 trillion target.

I am submitting detailed evidence to the Parliamentary Select Committee that is now looking at UKTI, but the bottom line is that the Chancellor should face reality and halve the UKTI budget to £265 million.  

The main recommendations are:

1. UKTI is top heavy: it needs more field workers doing what SMEs want and fewer HQ time-wasters. Cutting the HQ from 500 to around 50 is a necessary move, not because it is ultimately the right answer but because it is the only path to discovering how big an HQ is really necessary.
2. UKTI has now become a stand-alone executive agency, but UK field (advisory) staff should be integrated with Chambers of Commerce in a similar way to overseas staff within FCO posts.
3. Inward investment is largely be a matter for overseas posts and should be driven from there. The UK benefit from inward investment should be assessed on long term net value added, not the immediate effect on jobs and cash flow.
4. Potential UK exporters should be put in charge.  They should be asked what help, and especially contacts, they want, not be told how to do their business.  This should be communicated directly to overseas posts.  Overseas posts should then communicate back directly to the originators showing what action has been taken or why it has not.
5. UK-based trade advisers should work with potential exporters to improve the quality and clarity of their requests, but they should only be copied in – not be separate, and fallible, links in the chain.
6. OMIS and other statistical reports and surveys should be charged at much higher rates with potential users advised of the fallibility of this approach. Successful exporting and inward investment are a matter of overseas personal contacts, not paperwork.
7. Measuring UKTI performance by the number of UK contacts allegedly made and/or the number of exporters assisted should also be abandoned. The metric that matters is the value added by UKTI, not the achievements of the exporters themselves or other factors such as the Olympic Games.
8. The IT system should be refined to the simplest possible to allow exporters, those in overseas posts and advisors directly to access the status of their own projects – though such a project must start very small, given the government’s dismal track record in IT projects. UKTI can use this information to determine how many staff are needed in overseas posts and the UK and dynamically adjust resources accordingly.  

To read the full select committee evidence, read below.

[gview file="http://www.old.adamsmith.org/wp-content/uploads/2015/11/Submission-to-BIS-Select-Committee_2.pdf"]

Light in the FCA tunnel

The FCA was created to encourage best practice and thereby grow each of the financial services sectors under its oversight. By adopting an adversarial position towards its charges, it has achieved the very opposite of the Chancellor’s intentions, nowhere more so than in the personal financial advice sector.  The traditional arrangements for financially advising individuals were turned upside down at the start of 2013 by the FCA’s new rules (in fact a continuation of a policy initiated by its predecessor the Financial Services Authority) known as the “Retail Distribution Review” (RDR) in which Independent Financial Advisors (IFAs) could no longer be reimbursed by the providers of the investments selected, but only by the clients themselves. “Trail commissions”, i.e. the annual fees paid to IFAs by their customers over the lifetime of products such as pensions, with-profits bonds and unit trusts were banned on sales of new investment products from April 2014 and will required to be completely phased out by April 2016.  So the client must fund the advisory costs wholly up front instead of being able to spread them over the years of benefit. Is there any regulator, in any sector, anywhere in the world who restricts the way customers pay for services?

The IFAs were presumed by the FCA to be providing advice to maximise their own short-term gain rather than in their clients’ best interests.  If the FCA regulated independent shoe retailers, where different shoes also have different styles, features and benefits, the customer would have to hand over £30 before the assistant could advise on shoes.  The new rules showed that the FCA has no idea of how competitive markets, or IFAs, work.  There are thousands of IFAs, all of whom were already required to make full commission disclosure, and investors can, and should, shop around.

An IFA is trained explain their calculations and show the “present value”, using simple enough techniques such as discounted cash flow and factoring risk.  It is not quantum physics and if the investor does not understand every detail, it matters not. Present values of investment proposals are no more difficult to compare than house prices.

Sometimes IFAs split commission with their clients to be more competitive. IFAs businesses are built on long client relationships which would be destroyed by diddling their customers.

The clients of IFAs and shoe shops alike resent having suddenly to pay for what had always seemed free and, furthermore, to pay for advice before they had the benefit from it.  It is a bit like expecting consumers to pay for groceries in one month and receive them the next.  Needless to say, to the extent that IFAs and their advisees were consulted, their opinions were ignored.  The FCA knew best. 

The FCA torpedoed the market it was supposed to be nurturing.  According to Heath Report II which uses the FCA’s own figures, by March 2015 two thirds of the individuals previously seeking financial advice no longer did so: 23 million had dropped to 7 million causing 13,500 IFAs, and about the same number of administrators to lose their jobs.  The FCA claimed, with very dubious arithmetic, that the old system cost clients £233 million but their remedy is costing £344 million. And all these losses are before Trail commission is fully phased out.

It is truly extraordinary that HM Treasury should hand older people unlimited access to their pension pots precisely at a time when the FCA has removed the market’s capability to advise them.

But there is light ahead.  The head of the FCA has been replaced and, jointly chaired by his successor and a senior HMT civil servant, a new review started work last month which “will consider the current regulatory and legal framework governing the provision of financial advice and guidance to consumers and its effectiveness in ensuring that all consumers have access to the information, advice and guidance necessary to empower them to make effective decisions about their finances.”

Would it not be wonderful if sense prevailed?

Yes of course Thomas Piketty is wrong, why do you ask?

It was obvious from the moment of publication that Thomas Piketty was wrong. Simply because the world just does not resemble his dystopia of a capitalist plutocracy. The much more interesting work has been picking apart his assumptions and arguments to work out why he is wrong. Our own opinion is that it's an entirely political work. Standard optimal taxation theory states that we shouldn't be taxing capital or capital incomes (rents are another matter). This is unacceptable to certain political types therefore an argument, any argument, for taxing capital and capital incomes must be constructed. The End, Finis.

However, that detailed work of why he's wrong continues. As with this reported by Branko Milanovic:

But then suppose that capitalists decide to spend some of their r on fancy cars and yachts. There would be a split between the rate of return on capital (which is still r), and the rate at which capital grows (which will be now equal to r*=sr where s is the average saving rate out of capital income). It is then very clear that if capital does not increase as fast as output, the share of capital income in total net output (Piketty’s alpha) may not increase. It is at its most obvious if we assume that s=0. Then capitalists spend their entire income, the capital stock does not grow at all, and if the growth rate of output (g) is positive, the capital/output ratio will go down, and Piketty’s alpha will decline. Notice that all of this happens while r>g still holds in the background (on the production side).

If capitalists spend some of their income from capital then while the return to capital can be more than the growth of the economy, it does not necessarily follow that capital will ever increase sa a portion of that economy. Simply because some of that return is consumed, not spent. And it seems a reasonably logical idea that people would consume some of the income from their capital. No point in being rich if you don't have hot and cold running redheads Ferrari Testarossas after all.

As it happens the empirical evidence is that said capitalists do in fact spend some part of their income, do not save it all. And they spend a sufficient amount of it that capital is not becoming an ever greater part of the economy. Piketty is wrong, it ain't happening.

All of which accords with the general advice given to people with savings in fact. Sure, you want to reinvest some of your returns because there's this thing called inflation. Meaning that some part of your current returns are in fact illusory, and you need to reinvest some part of those returns to make sure that your income in the future is the same, in real terms, as you've got now. But once you're managing that, sure, go buy that redhe sportscar.

That is, capital maintenance and the best living standard possible compatible with that is how the rich, just like everyone else, seem to act. Thus capital doesn't ever concentrate.

Ten initiatives to help young people: 1. Housing

Young people find it difficult to obtain housing because it is so expensive.  This is because demand is rising much faster than supply.  People live longer and occupy housing for longer.  An increasing proportion of people choose to live singly, and immigrants add to the population.  All these factors increase demand, but planning regulations prevent a corresponding increase in supply.  More homes are needed, and it should be made easier to build them, and to build ones suitable for young people. Parts of the green belt are by no means green.  Agricultural land around cities is often given over to monoculture with quantities of fertilzers and pesticides poured into it to grow huge fields of a single crop, resulting in poor habitat for birds or small mammals.

One solution would be for government to buy chunks of agricultural land around cities.  They would do so at the market prices for agricultural land, or slightly above, and from farmers willing to sell.  Government would then re-zone the land as suitable for building, and sell it, again at market prices, to developers.  Since land that can be built upon sells for many multiples of the price of farmland, government will make huge change-of-use gains.  

The sale of large blocks of such land will lower the price of building land.  The hundreds of thousands of extra houses built upon it will lower the price of housing as the supply more than keeps pace with demand.  Government could designate a proportion of the new homes specifically for young people.

The result would be extra housing where people wanted it to be, on the edges of cities instead of beyond the green belt.  Much of it would be more affordable to young people, who would then be able to live closer to where they work, without having to pay exorbitant housing costs.  With more young people finding it easier to buy homes, the pressure on rental properties would decrease, lowering the living costs of those who choose to remain and rent properties within the cities.

The programme of building such housing would boost employment, creating tens of thousands of extra jobs, including jobs for young people.  It would give the economy a significant boost.  More to the point, it would solve one of the most serious problems faced by young people today.

We are ruled by idiots

A crucial economic distinction is between a complement (no, not a compliment) and a substitute. For example, it is often asserted that more pornography leads to more sex crime: we are indeed primates and thus potentially subject to the "monkey see, monkey do" cause of action. That would mean that pornography is a complement to sex crimes: one aids in causing the other. However, as it happens, the rate of sex crimes has slumped in these past couple of decades as pornography, of ever greater detail and possibly vileness, has become ever more available. We must therefore conclude that the two are, generally and upon average, substitutes. Urges are expended upon the one meaning that less of the other happens. It is, of course, absolutely vital that public policy manages to make this distinction. For the problem is the sex crimes, not the pornography. Thus we should not ban the one in order to reduce the incidence of the other, the real problem. This has been violated by our rulers as this reduction in the real problem also applies to child pornography, as we've noted here before. Yet child pornography is highly illegal in order to reduce the number of sexual crimes committed against children.

Yes, we agree, it will be very difficult for any politician to get that across to people. However, we've another example of just this sort of mistake. We've just had a change in the law:

On 1 October 2015 it became illegal:

for retailers to sell electronic cigarettes (e-cigarettes) or e-liquids to someone under 18 for adults to buy (or try to buy) tobacco products or e-cigarettes for someone under 18

Are e-cigarettes a complement or a substitute to teenagers smoking cigarettes, the things which are actually the problem?

More than 40 states have banned the sale of electronic cigarettes to minors, but a new study out of the Yale School of Public Health indicates that these measures have an unintended and dangerous consequence: increasing adolescents’ use of conventional cigarettes.

Using data from the National Survey on Drug Use and Health, the research finds that state bans on e-cigarette sales to minors yield a 0.9 percentage point increase in rates of recent conventional cigarette use by 12 to 17 year olds, relative to states without these bans.

A substitute not a complement, therefore e-cigarettes should not be banned for teenagers it might even be sensible to encourage their use.

And we must then conclude that we are ruled by idiots.

Those of us who do or have worked in and around Westminster have known this for a long time. It's why we expend so much effort in trying to bring the rest of the country up to speed on the matter.

To understand why economic growth is slow look at Keystone XL

The saga over Keystone XL is an excellent example of why rich world economies are in general slow growing at present.

President Barack Obama rejected the Keystone XL oil pipeline on Friday, in a move that infuriated conservatives but will bolster his legacy on environmental issues ahead of next month's climate change summit in Paris.

No, not because the pipeline will now not be built, not because of those climate negotiations and no, not because conservatives are unhappy about this.

The pipeline was to bring Canadian tar sands oil down to the refineries on the Gulf Coast. Very simply, refineries further north just aren't set up to process such heavy crude. The ones on the Gulf are. So, instead of changing all the refineries, build the pipeline to get the oil to where it can be efficiently processed. And that's really it.

Given current crude prices those tar sands are shutting down some production and the whole plan is just less important than it was. And while the plan did indeed have a positive current net present value (and thus was something that made us all generally richer) it wasn't either as earth shattering as the proposers suggested nor as earth shattering as the environmental protestors insisted. And in something the size of the US economy something like an oil pipeline or not is always going to be a marginal decision.

The decision whether to build it or not is obviously highly interesting for those directly involved and for the rest of us very much a "Meh" question. Except for this:

Mr Obama's announcement follows a seven-year review process

It's worth noting that it is only phase IV of the project that has been cancelled. The other three phases are up and running. And they each took between one and two years to build.

That is, we now have a system whereby it can take 7 years to get a decision on whether one can build something which takes two years maximum to build. And that is why modern economies have a slower growth rate than they perhaps should have. Not because people aren't allowed to do things like build oil pipelines, but because the entire economy is being strangled by red tape.

Perhaps we should have environmental regulation of the type that stops such building. Perhaps we shouldn't: the existence or not of such regulation isn't the problem at hand. What is the problem is that whatever the decision is it needs to be made quickly. So that either the project can be built or, if rejected, then everyone can stop their efforts at filling out paperwork and go off and do something more interesting.

We obviously do have our view of which way this decision should have gone. But that isn't our point today. Rather, if we're going to have a system of regulation over who may do what then it has to be an efficient system of deciding who may do what, how and when. Even to whom. Otherwise the entire economy will descend into a welter of form filling that would make C. Northcote Parkinson proud and the rest of us poorer than we need be.

There really is no gender pay gap

As we've been saying for some time now, there really is no gender pay gap. At least, not one of any size that anyone should be bothering to do anything about. It's a motherhood pay gap, most certainly, but then that's just not the same as gender is it? This latest empirical report comes from the US:

A new report from PayScale, a jobs website, takes a stab at this very problem by looking at the gender gap in various occupations controlling for factors including experience, education, company size, and crucially, job title. According to their data, female doctors make 29.2% less than their male counterparts, but that gap shrinks to just 4.6% after introducing the controls. This in part because women are more likely to work in paediatrics, while men are more likely to work in the better-paid field of surgery. A similar pattern exists for lawyers: women make 14.8% less than men, but just 4.1% less on an adjusted basis. Again, there are differences in the types of jobs taken by men and women: 8.7% of female lawyers work for non-profit outfits, compared to just 4.5% for male ones. The pay gap for all workers is 25.6% before such differences are controlled for, and 2.7% afterwards.

We think 2.7% is pretty much the end of the story. And certainly we cannot think of any government work that's ever managed to be any more accurate than that.

In effect, much of the gender pay gap can be thought of as the cost of having children.

Quite: fathers make more than non-fathers among men, mothers make less than non-mothers among women. Whether that's a cultural or an innate feature is another matter: but that's where whatever remaining problem is. And it's not entirely obvious that it's something that's amenable to anything other than the slow change of cultural practices, whichever of those two causes are responsible.

Power Up: The framework for a new era of UK energy distribution

The UK's energy market is unfit for the modern age, a new report from the Adam Smith Institute argues. The report, Power Up: The framework for a new era of UK energy distribution, argues that new technologies such as smart grids and distributed energy production can revolutionise old models of energy distribution and pricing, in the same way that apps like Uber are disrupting traditional models of transport.

In a world of expensive of energy prices, the report suggests regulators should encourage experimentation with new technologies, rather than cutting them off at inception. Regulating the market too heavily - often justified by claims that consumers are being 'ripped off' or overwhelmed by the number of tariffs available - closes down consumer experimentation and prevents technological and economic progress, which keeps energy prices high.

The paper envisions a world of choices in the energy market; where smart meters that relay real-time price changes to encourage better energy use are just the beginning. The author, Dr Lynne Kiesling, imagines consumers being able to see where their energy is coming from, and to choose what kind of green-grey energy mix they want.

Most important, Dr Kiesling argues, is for OFGEM to adopt a structure of 'permissionless innovation' - which allows companies to experiment freely without being granted permission from regulators. In the early days of the internet, no-one envisioned a world of Amazon, iPhones and Uber; but these inventions were able to thrive, as there were not limited by regulatory barriers. OFGEM, Kiesling argues, needs to adopt a more relaxed regulatory structure that dismantles the barriers that have been created.

Read the full press release here.

For further comments or to arrange an interview, contact Head of Communications Kate Andrews: kate@old.adamsmith.org | 07476 915072