Proof that regulation is not needed used as proof of the desirability of regulation
This is a rather alarmingly bad piece of logic from a prestigious source:
The Committee employed investigators to collect data from the munition plants and to conduct surveys of the health of the workers. From the data collected, the Committee made a number of recommendations including mandatory shorter working hours, the avoidance of continuous night shifts and, above all, giving workers at least one full day off from work each week.This study revisits the data collected by the Committee’s investigators and determines whether the Committee’s recommendations are supported by this new examination. It finds the Committee’s recommendations fully justified. For example, with respect to the value of one day off work each week, Professor Pencavel calculates that the week’s output was slightly higher when these munition workers worked 48 hours over six days than 70 hours over seven days.
Excellent. So there's an optimal length to the work week then. All work and no play produces not just dullards but lower output.
So, what would we expect a profit making employer to do then? Correct, try to determine where that optimal work week length was and then employ people for that period of time. But what does our professor suggest instead?
‘Instead of viewing restrictions on working hours as harmful restraints on management, statutory regulations on hours may serve as an enlightened form of enhancing workplace efficiency and welfare.’
He's using the proof that a profit maximising employer doesn't need such regulation to argue for such regulation.
Most, most odd.
Markets can see the future
One argument that monetarist economists like myself often make is that what matters is not so much the central bank's policy now, as what the central bank is expected to do in future years. The Bank's base rate might be low right now, and the Bank may hold rather a lot of government bonds in a big quantitative easing programme—but if it's expected to offload the gilts and hike rates tomorrow, markets will react today. Macro conditions are tight now if monetary policy is expected to tighten soon. A new paper (pdf) from Stefania D'Amico and Thomas B. King of the Federal Reserve Bank of Chicago, and entitled "What Does Anticipated Monetary Policy Do?" tackles this question empirically, looking specifically at 'forward guidance' over rates—where central banks tell markets they will keep policy interest rates at a certain level for a certain amount of time in the future.
They use a methodology similar to earlier papers, including one that I wrote about earlier, using surveys of financial market actors to work out whether a given change in rates (or planned future rates) is a shock or not.
They identify this difference by looking at expectations of inflation and GDP. If lower forward rates coincide with lower expected inflation and GDP, they reason that rates are being lowered to counteract some external factor driving inflation and GDP down. If lower forward rates coincide with higher expected inflation and GDP, they reason that the rate lowering signals an easier monetary policy overall, higher future aggregate demand, and thus higher nominal variables (and if there's any demand deficiency, higher real variables).
It's the second kind—where rates and inflation/GDP move in opposite directions—that signals a change in policy. And this policy change, according to D'Amico and King's data, feeds through into real outcomes. Promising easier policy does lead to easier conditions now—raising inflation and real GDP right away—and in fact it does so substantially. In their own words:
We find that when survey respondents anticipate a monetary policy easing over the subsequent year (controlling for past macro data and the current policy stance), this leads to an immediate and persistent increase in both prices and output.
For example, a decrease of 25 basis points in expectations for the average short-term rate over the next year, holding all else constant, results in a short-run increase in both GDP and the price level of about 1 percent.
These effects occur much faster than those of a conventional monetary-policy shock, which we identify in the same VAR. After about two years, a given shock to policy expectations has about the same effect on output as a conventional policy shock of the same size and an effect on inflation that is 2 to 3 times as large.
Shocks to expectations beyond the one-year horizon still have effects in the same direction, but they are smaller, less persistent, and not always statistically significant
Now, this doesn't necessarily mean we want central banks to do forward rate guidance. We might reasonably want them to get out of the business of setting any of the lending rates in the economy, and simply adjust the supply of money to meet demand, as private banks would do under a free banking system. But this does give us an extra reason to be wary of fiscal policy in slumps—monetary policy is enough.
A surprisingly good idea about council housing
This isn't what we really expect from governments of any stripe but occasionally the odd good idea does manage to filter through the system, possibly by mistake. And such is this idea that council (and then housing association) tenancies should be for five years, not life. It's causing the usual moaning over on the left for there's absolutely nothing quite as conservative as the British left. Everything, but everything, must be left exactly as it was first laid out under St Atlee to hear some of them pontificate. Yet none of them manage to even ask, let alone answer, the crucial question:
In a stealthy amendment to the housing and planning bill, the government has announced an end to lifetime council tenancies. All new council tenants (and eventually housing association tenants) will be given maximum five-year contracts, after which their circumstances will be reviewed. If they’re told to leave they’ll be offered a more suitable council tenancy, directed towards other rental options (the expensive private sector) or assisted into home ownership.
The government has thus far refused to confirm any exemptions (for the long-term disabled, say, or families with small children). It’s unclear who would be conducting these reviews, and no assurances that this wouldn’t turn into another welfare-bashing crapshoot.
That crucial question being, if you need aid and welfare at some point in your life why should that turn into a lifelong subsidy?
Any and every system of governance is going to have some form of aid for housing for those who cannot afford it any other way. We're fine with that. Three's all sorts of things that can occur in life that mean that welfare, aid, is required for some period of time. Unemployment means unemployment benefits, being ill means treatment and possibly even benefits while being treated. But we do not then say that because you were unemployed in 1992 therefore you should have unemployment benefit for the rest of your life, nor do we say that because you were ill in 2002 then you should still be resident in an NHS ward. And so your requiring aid in gaining access to housing at some point should not mean access to subsidised housing for the rest of your natural days.
After you don't need welfare you shouldn't get welfare in short.
Top tools for understanding economics
There are vital thinking tools that people well-informed in economics have that most other people do not. These tools are roughly translatable as being the following 8 things. These things are ones that need to be understood, but frequently are not. 1) Almost every action has tangible and intangible benefits, and tangible and intangible costs, and if you haven't considered all of those factors thoroughly you do not understand enough about what you’re doing.
2) Just because there are good intentions and a perceived ethical stance behind a view or an action, this does not mean what you have is a good idea. In fact, quite often good intentions and a perceived ethical stance actually mask the reasons why many ideas are bad ones.
3) Just about everything in life is a trade-off, where something happens at the expense of something else (primarily time, money, and material resources) - and there is rarely anything you can do, or ought to do, that lies outside of this consideration.
4) If there is one thing that should almost never be interfered with it is the mechanism of prices that are dictated by the supply and demand market. Prices are not just sums that tell us the value of something, they are vital information-carrying signals that inform us of the outcome of billions of transactions throughout the world. No politician can know the market clearing price of anything better than the market knows itself.
5) The economic pie is not fixed, nor is it zero sum. If I have a slice of it, this does not mean it leaves less for you, because the economy can keep growing, creating wealth and value for both of us.
6) The principal drivers of human prosperity, increased well-being and economic growth are trade and competition.
7) Just as in the market of goods and services, tax is also something that also ought to be opened up to competitive forces.
(Note on 7: Just as shops and restaurants compete with one another for your custom, so too do governments of nation states in their rates of taxation (they would be able to do this more successfully were it not for the fact that so many people are under the misapprehension that society would be better if the rich were taxed more). Governments are competing with governments of other countries for foreign investment, where attracting more external workers and more capital investment from foreign entrepreneurs benefits the nation. People want to work and invest in nations where they are not taxed too heavily on their income and their investments.
8) To properly understand economics you have to understand incentives. When one person goes out to complete a transaction based on self interest, he (or she) adds a little bit of value not just to his own circumstances, but to every agent involved in the transaction (the seller, the transporter, the manufacturer, those mining for raw materials, and so on). Multiply that one transaction by the billions that have been going on every day in the past century and a half (in particular) and the result is the Smithian invisible hand mechanism that aggregated to all the increased prosperity and well-being the world has seen.
Understanding these 8 points provides the bedrock on which you can build pretty much your entire arsenal of economic understanding, political analysis and societal commentary. Virtually everything you need to speak rationally on any of those three things is bootstrapped by the wisdom of 8 points above.
Entirely the wrong decision on climate change in Paris
What is so maddening about this climate change kerfluffle is that everyone, but everyone, seems to be determined to make the wrong decisions, entirely ignoring everything they are being told by the scientific consensus on the subject. There've been a number of reports chewing over what should be done, assuming that the case for doing anything has been made, and they all say much the same thing. That this decision just announced is wrong:
A new UN climate change deal is expected to commit the world to trying to limit global warming to 1.5C - despite warnings the target cannot be achieved because people will never vote for the costly policies it would require.
The highly ambitious goal would require such a radical shift to expensive green energy that it would be impossible in a democratic society, a leading academic warned last night. It would also require as-yet-untested technologies to extract carbon dioxide from the atmosphere, others said.
The point is explicitly made in the Stern Review.Our target, if target there is going to be, should not be any particular temperature nor even level of emissions. It should be the cost of whatever changes we make. This is simply very basic economic reasoning.
If there are to be damages in the future then sure, we should pay some amount now to avert those damages. But obviously, we should not spend more now than what those damages will be: to do so would just be making everyone, present and future, poorer for no very good reason. Thus the most important number we need to know is what is the cost of averting the damage.
To insist that some particular temperature goal, or even emissions number, should be met regardless of the cost of doing so is to invert this reasoning. And given that the original reasoning in Stern (the economic reasoning, whatever one thinks of the climate science underlying the issue) is correct in its logic, this makes setting a temperature or emissions target is just the wrong thing to be doing.
We'd be much more amenable to discussing the climate change issue if everyone wasn't so insistent on applying what we know, absolutely, is the wrong answer to it.
It's great that we've got Dickensian working conditions these days
Felicity Lawrence is trying to tell us, over in The Guardian, that working a pretty bad job in a Sports Direct warehouse is equivalent to Dickensian times. Total nonsense, of course. For the only people asking for another bowl of gruel these days are the Islingtonistas who scoff down the Italian equivalent, that polenta pictured above. That the cheap (and disgusting) sustenance carbohydrate of the masses is now eaten by no one at all other than fashionistas shows us quite how far we've come. However, there's a deeper mistake that she makes:
Sadly, the Sports Direct warehouse is not an aberration. Much of the growth in employment of recent years has been in this field: jobs that in fact represent the death of the real job. The idea that a company’s value and brand is built not just by its owners but by the labour of all its workers has become a lost paternalistic dream. The notion that staff should be rewarded for their part in success with a fair share not just of profit but of security has all but disappeared. The risks of doing business, traditionally carried by capital, have been pushed down to those who can least afford them.
Yes, that's exactly how we want it too. No, not because we're siding with the plutocrats but because anyone at all with the ability to see can note that this last recession was somehow different. Where did all the unemployment go? Given the fall in GDP we would have expected a rise in unemployment to perhaps 4 or 5 million. As many did in fact predict and as did happen (and very much worse) elsewhere. Instead, in the UK, productivity and wages fell.
The answer is at the core of the Keynesian (and New K) analysis. Wages are sticky downwards: thus, in a recession, when labour needs to become cheaper relative to what it produces, we get spikes of unemployment as that's the only way that wages do indeed fall. And this time around this just didn't happen. Incomes took the hit, not employment. The result being that we must conclude that we have a much more flexible labour force, that wages are less sticky downwards.
This is generally thought to be a good thing. In bad times, that all or most lose 5% of their incomes could be, if that's the way you want to look at it (we do), considered to be better than 5% of the people losing their entire incomes. So, that's how the labour market has been rigged. So that it is incomes and wages that take the minor hit, not some subset of the population that take the major unemployment hit.
Profits and capital income also fell, by much more than those labour incomes, so it is shared pain, not entirely loaded on one side or another.
But that is the choice that has to be faced. We either place all the risks of busts on capital, in which case we risk soaring unemployment in such busts, or some part of it is placed upon flexible labour and thus some part of the pain is felt in minor losses of income.
Well, which do you prefer? And you can only choose one of those two, there are no others available to pick from.
An unelected check is better than no check on the House of Commons
Who says politicians are useless and inefficient? They are superbly efficient at one thing, at least – curbing any restraints on their own power. Thus Lord Strathclyde, the Conservative grandee charged by Prime Minister David Cameron with reviewing the role of peers in the governance of the United Kingdom, is set to propose that the Lords lose their veto over delegated or ‘secondary’ legislation. It all stems from the Prime Minister’s (and the Chancellor’s) agitation at the House of Lords blocking plans to cut tax credits. And that was not the first time that the Lords has irritated the House of Commons by questioning its legislative plans.
The argument is that the Commons is elected and the Lords (mostly) isn’t. So the Lords have no right to block Commons legislation. But even the most slavering MP these days would not suggest simply abolishing the Lords and giving the House of Commons absolute power. That would lead to riots. But they figure they can get rid of the ‘problem' a bit at a time. The Lords have already lost their powers to block financial legislation; they can delay but not veto other measures; and the Parliament Act, designed to be used in dire emergencies, is now deployed with dazzling frequency, to push through measures that the Lords feel queasy about.
Lord Strathclyde’s proposals are just the latest sortie in these one-sided air-strikes. Secondary legislation is the detailed regulatory stuff that MPs can’t be bothered with, and delegate to officials: so (runs the argument) why do we need the Lords to worry about that?
Well, we should all worry about it, as we can at least get rid of MPs and even overturn laws, but we can’t vote out regulators. Scrapping regulations ain’t so easy, either. So it is good that such proposals are properly scrutinised before they get going. Give it a year or three, though, and there will be some other issue, and the Lords’ powers will be trimmed again. And again.
Don’t mistake me: there is a lot wrong with the Lords as a legislative chamber (it should be one-eighth of the size, for a start). But it is better to have a crude check on the House of Commons than not. The UK has the most extraordinary ‘constitution’ in which the Executive sits in the House of Commons, and the Commons can vote for anything it wants – including changing the constitution itself (as with devolution – and see where that is getting us). About the only thing that can stop it, apart from the public armed with pitchforks, is the fact that there is a House of Lords standing in the way.
The earliest liberal thinkers on constitutional matters understood the importance of checking power with power. Montesquieu (1689-1755) argued for separate legislative, executive and judicial bodies – and that the legislative branch should comprise two Houses, so one could block the decisions of the other. He was not wrong. Our politicians don’t want to understand this: the worry is that the public and the commentariat don’t seem to grasp it either.
More evidence that the NHS is providing substandard care
Back in April, the Institute of Economic Affairs released a paper that found the UK’s healthcare system to be severely lagging behind neighboring countries. The research, carried out by author Dr Kristian Niemietz, found that social health insurance systems – especially in the Netherlands, Switzerland, and Germany – perform better than the NHS across the board, from the quality of healthcare provided to the heath outcomes of patients. Most shockingly, Niemietz found that “9,000 more deaths occur each year in the UK than would have if the performance of the NHS had matched that of the German system, in terms of avoidable mortality.” Just last week, the IEA released another paper from Niemietz, called Diagnosis: Overrated - An analysis of the structural flaws in the NHS, which highlights the structural flaws and political hindrances that keep the NHS from producing better results:
The NHS’s status as a sacrosanct institution promotes ‘groupthink’ and undermines the ability to detect and correct instances of failure, and to adapt to changing circumstances. This was most immediately evident after the Mid-Staffs scandal.
The idea that ‘we’, the public, run the NHS ‘collectively’ is a popular illusion. Democratic accountability in the system is so vague and roundabout that it is almost meaningless in practice. There is almost zero overlap between the health policies proposed in general election campaigns and those enacted afterwards. The insistence that ‘the people’ are really in charge is empty rhetoric. The health service is run by the political class, senior bureaucrats and the medical establishment.
More specifically, from the paper:
Under a system of meaningful exit options, patients would not just have had the option to bypass Mid Staffordshire, but funding organisations (e.g. health insurers) would also have had the right to withhold payments, given that Mid Staffordshire was clearly not fulfilling its side of the bargain. A pincer movement of this sort might well have bankrupted the hospital, eventually making room for a more suitable provider. That threat of revenue loss and bankruptcy, not ‘democratic accountability’, is what brings providers’ self-interest into line with patients’ interests.
Niemietz’s findings from both April and December are valuable additions to the accumulating evidence that the NHS is in dire need of reform. His research backs up the most recent OECD report, that found the UK’s quality of healthcare to be “poor to mediocre” and its preventative care measures to be “outstandingly poor”.
Unfortunately, most UK politicians seem deeply committed to maintaining the status quo and providing Brits with substandard care. But slowly, evidence is finding its way into the heart of the healthcare debate, and the successes of market-based systems in Europe can't be ignored much longer, as the NHS continues on to its breaking point.
No, no, they're quite right here we really must change business rates
A new report out, insisting that it's landlords, not retailers, who bear the majority of the burden of business rates:
Business rates hurt landlords more than retailers, a new report has claimed, and reducing the burden of the levy could generate 4,000 new jobs and up to £1.75bn-worth of development in the sector over the next five years. Landlords are unable to invest in new real estate as a result, the study claimed, and increases in business rates have led to the country missing out on £670m of new development, and 6,000 fewer jobs over the past three years.
That report is here:
The report, launched today by the British Property Federation, (BPF), British Council of Shopping Centres (BCSC) and British Council for Offices (BCO), written by Regeneris Consulting, has revealed that over a period of two to three years, approximately three quarters of any increase in business rates is transferred to landlords as occupiers push for lower rents.
In other words, business rates limit the rents that landlord are able to charge to their occupiers. This reduces the potential level of new real estate investments that they can make and reduces the amount of new commercial property development. However, not all of the cost of rising rates is passed on to landlords, with approximately 25% being borne by occupiers.
They're entirely right, this is just terrible news. And it's such terrible news that they're also correct in their insistence that we must change the system.
We don't want landlords to carry 75% of the burden of business rates at all, we insist that they should carry 100% of it. We also don't want to tax the value of development at all, just the value of the land which is affected by the other developments around it.
That is, business rates are a crude proxy for a land value tax and as a crude proxy they're not quite good enough. What we want instead is a proper land value tax, one that taxes the undeveloped value of that specific plot of land, that value being determined by all the other development that has taken place around it. What is actually developed upon that plot should not be taxed in the slightest. In that manner the retailer, the occupier, will not be bearing any of the cost of the rates, the developer will not be yet the landlord of the land itself will be carrying the full burden.
Which is how it should be. So, we must thank the landlords for bringing this appalling state of affairs to our attention. They're only carrying 75% of the burden when it should be 100%. Change the system now, revolution!
Business rates: not such a good tax after all
Taxes, eh? Just when you think you’ve found a good one, it lets you down. We usually think of business rates as some of the least bad taxes we’ve got, because to a large extent they’re like land value taxes. Land value taxes are far from perfect but they do less harm than most taxes. For a start, they tend to fall on landowners, rather than land occupiers, because the supply is fixed. Tim Worstall explains this here, and the empirical evidence is quite strong that a £1 rise in rates leads to a nearly-commensurate fall in rents over the long term.
They’re also less distortionary. A good rule of thumb is that if you tax something, you get less of it, which is why taxes on capital are such a bad idea. But since there’s a fixed supply of land, taxing the value of land doesn’t get you less of anything. Nice one.
Unfortunately this might not be how business rates really work, because they tax the value of property rather than land. To a large extent this is a tax on land and that’s all fine and dandy, but you’ll notice that a five star hotel costs more to stay in than the Bates Motel next door, even though the land they’re built on is worth the same. This is because the actual bricks and mortar on top of that land have different values too.
The British Property Federation (and chums) have a new report out today which points out that this might be a serious flaw in business rates. They argue that most landowners have other investments too, and will shift their money from property to those investments when business rates rise:
A rise in business rates will reduce the rents that a landlord is able to achieve and therefore reduce the potential level of new real estate investments by a sum equal to the value of the tax burden transferred from occupiers to landlords business rates … If a proportion of business rate increases are capitalised into lower rents, then there is a likelihood that this will impact on the level of new funded commercial development.
That’s an important point – I’m not sure about the numbers they use, which suggest an extremely high elasticity of investment that I don’t think is justifiable, but it’s still an important point.
Just as important: the less frequently revaluations are done, the more uncertainty there is in the system. Uncertainty is a deadweight loss – it destroys wealth and makes everyone worse off. As we’ve pointed out, it’s not difficult to estimate property values on a rolling basis.
What’s really interesting about this report is not just what it’s saying but who’s saying it. Most industry bodies are woeful on business rates – they wrongly assume that the incidence is on firms because they’re the guys writing the cheques. For the BPF to come out and reject this – and do so with reference to most of the existing academic literature, no less – is very encouraging. But they do have a point about the investment effect.
So, must we throw business rates on the scrapheap too? It depends on the elasticity of investment – how much less money goes on property investment when rents fall after rates rise. And the way to fix things is quite simple: tax the value of the land, not the property that’s built on it.