Minimum wage debate: still not over

The new round of NBER papers is, as ever, interesting. One of particular interest comes from Jeffrey Clemens at the University of California San Diego. He refreshes the minimum wage debate by dialling in on the effect of hikes (a) during the great recession and (b) on lower-skilled individual aged 16-30, finding a fairly substantial effect on that group.

I analyze recent federal minimum wage increases using the Current Population Survey. The relevant minimum wage increases were differentially binding across states, generating natural comparison groups.

My baseline estimate is that this period's full set of minimum wage increases reduced employment among individuals ages 16 to 30 with less than a high school education by 5.6 percentage points. This estimate accounts for 43 percent of the sustained, 13 percentage point decline in this skill group's employment rate and a 0.49 percentage point decline in employment across the full population ages 16 to 64.

The debate is not over, but this does look like a reminder that there's 'no such thing as a free minimum wage hike'.

The coming reversal of inequality

We're consistently told that the current level of economic inequality is unsupportable and that therefore something must be done. You know, that death of capitalism thing and why don't we just all sing Kumbaya together? However, it is rather necessary to work out why inequality has been increasing and even what sort of inequality has been increasing. As it happens global inequality has been falling: the poor are getting richer faster than everyone else so the gap between the top and the bottom is closing. So, that's good from any angle: absolute poverty is being beaten, the sort of thing we worry about, and inequality is reducing, the sort of thing others worry about and we don't. However, inequality within rich countries has been increasing: as before, not something we worry about very much if at all although obviously others do.

But why? And the real underlying reason is that in he past few decades we've added a few billion people to the global labour market. That's really what globalisation has done: and it's why poverty and overall inequality are receding. but that has meant something of a change in relation to capital and labour. Roughly the same amount of capital (and this is true of human of financial capital, true of highly skilled labour or pure capital) is being added to vastly more labour. Relative scarcity thus tells us that the returns to capital (again, both human and financial) will rise as against the returns to labour. Given that capital is very much more concentrated in ownership than labour thus inequality rises.

And that's usually the point at which the analysis stops. Something must be done and usually it's tax capital much more so as to give to labour. But the actual point we want an answer to is, well is this going to continue?

No, actually, it's not:

Based on UN population estimates, the number of people in the developed world aged between 16 and 64 peaked in 2010, while the number of people aged 60 and over will exceed the number of children for the first time in 2047, and more than double from 841m in 2013 to two billion by 2050. In the UK, the average age is expected to rise from 40 years in 2014 to 42.9 by mid-2039, when one in 12 people is projected to be aged 80 or over, according to the Office for National Statistics (ONS).

This is not just a rich world phenomenon. It's almost certainly true that we've reached, or are just about to, Peak Labour. From here on in demographic changes mean that labour is going to become more scarce relative to capital, not as in recent decades in glut. Thus we would expect the relative prices to snap back and thus that globalisation induced increase in inequality to go away again.

Meaning, of course, that we don't need to tax the rich into penury at all.

The re-emergence of the hard left

“Always after a defeat and a respite, the shadow takes another shape and grows again." "I wish it need not have happened in my time," said Frodo.

"So do I," said Gandalf, "and so do all who live to see such times. But that is not for them to decide. All we have to decide is what to do with the time that is given us.”

Some Conservatives short-sightedly welcomed the rise of Jeremy Corbyn to the Labour leadership because they hoped it would make Labour unelectable. It might, but accidents happen in politics. What it has done is to put lunatic policies into mainstream discussion. Because of his official status his pronouncements have to be covered by the media as if they were serious viable policy. We now have to listen daily to ideas that were discredited decades ago. Back from oblivion have come the nostrums of state-run businesses and punitive tax rates on those disapproved of. His appointment of like-minded colleagues has dispelled any notion that he might be a coalition builder and someone who can create the compromises that real-world government is built upon. The fanatical zealotry of some of his supporters, and the hatred they exude towards opponents, gives us some idea of the sort of politics that could be inflicted upon the country.

The danger has to be confronted. The ideas and arguments put out in support of extremist proposals have to be shown to be dangerous, impractical nonsense. These have been tried many times and have failed many times. The arguments for free choice, competition and enterprise, have to be made again and won again. We will play a part in that. Some of what we say will be well-known to some of our loyal readers, but it is worth saying it to a new audience who might otherwise be fooled into thinking that the state can run businesses efficiently, or that government can run people's lives better than they can do so themselves.

We will publish a series of posts which remind people of the core principles of why liberty and markets are usually better than governments and state officials at improving people's lives.  We will look forward, as we always do, and innovate ideas that can address problems and shortcomings with practical solutions.  But we will occasionally look back to the reasons why Socialism failed before, and why it would fail again, were it to be given the chance.

This is what will happen to solar tariffs everywhere, eventually

Interesting news from Nevada: the state now has solar feed in tariffs on a rational economic structure. It's still not all the way there but the structure is now sensible: and this is the way that all such tariffs will end up to. Simply because it's the only rational way, economically, to do it. Instead of getting the retail price for whatever electricity they feed into the grid, panel owners now get:

This summer, NV Energy, Nevada's largest utility and a subsidiary of Berkshire Hathaway , had asked for a rate structure that included a monthly service charge, a demand charge (based on a home's peak demand), and an electricity charge. For homes with solar, it proposed paying 5.5 cents per kWh for the electricity they send to the grid, well below the 11.6 cents per kWh that customers are paying for electricity.

This is simply the way that it has to be, in the end at least. Leave aside any concerns about whether it should be yet or not and consider the underlying economics of this. The grid needs to exist if we're to share power at all. And thus it needs to be paid for: a standing charge doesn't seem like a bad idea as a method of paying for such infrastructure. And the size of that charge needs to be determined by peak drawdown (or perhaps feed in to it) as that is what determines how the grid is built.

And then, yes, everyone should be paid the current value of what they are feeding into said grid. And with solar that's only ever going to go down. As there's more solar on the grid then of course there's more of the grid that is all producing at the same time: that's how sunshine works across geographic areas. In the end, instead of being paid the wholesale price for power people are going to be paid the marginal price for power at that time. Something that the more the technology becomes as a percentage of total supply is only ever going to go down.

This isn't just a "Har, Har, Hippies!" argument: the only economically rational manner, in the long run, of paying for a grid that contains solar, or indeed any other local and or intermittent source, is going to be this one. A charge for the grid, scaled to the size of the connection, with production gaining moment by moment marginal value, consumption possibly based again on that marginal value. It's really going to change how things are done: and if we don't move to something like this then the system is going to go bankrupt instead.

Thus, obviously, it is going to happen: the only question is when.

Isn't this just fascinating?

Just so surprising who it is that is complaining about business rates:

The archaic business rates system is putting off international companies from coming to Britain, the boss of the UK’s biggest shopping centre owner has argued. David Fischel, chief executive of Intu, has told the Telegraph that the business rates system is “absolutely putting off international retailers from coming to the UK”.

Actually, no, not surprising at all. Intu is a real estate investment trust. Essentially, it owns commercial property and pays out the income to investors. Given this structure it is those investors who actually bear the economic burden of business rates in lower payments from the company. Business rates are not perfect, the tax should be levied on the value of the undeveloped land plus whatever permissions there are to do something with that land, rather than the value of what is built upon it. But even so, they're still a close approximation to a land value tax and as such a pretty good tax. And they're incident upon the landlord, which is where such taxes should be incident.

So, there isn't actually all that much surprise: Mr. Fischel's call is "Don't tax my people, tax some other bugger".

Spanish fashion group Inditex has been introducing more of its brands to the UK market, such as Pull & Bear and Stradivarius, but the Zara owner is said to be looking carefully at its investment return, with business rates a rising cost.

Zara tends not to own property, but to lease it. Thus rates are not incident upon Zara, but upon the landlords from whom it leases. We can indeed prove this too: when business rates were reduced in Enterprise Zones rents went up to compensate. Or rather, as is the way of such things, currently rents are depressed by the tax take of those business rates. Which is, again, precisely where we would like the incidence of the tax to be.

Mr Fischel called the rates system “a monster – in essence it’s an inflation-linked Government bond attached to our property assets”.

Yes, yes, it is. And that's what it's supposed to be too. It's one of the few pieces of the tax system which actually does exactly what it says upon the tin. We must get our tax revenues from somewhere and land value taxation is the least distorting manner of doing so. Thus why we do, and should, tax in this manner. The rents being received by the shareholders in Intu are exactly what we are trying to tax. And they are also what we are taxing. Sure, obviously, it is Mr. Fischel's job to complain about this but that doesn't mean we should pay him any mind as he does so.

The law can be a funny thing

This is a fun little case, rather appropriate for today given last night's excesses. Yet there's something profoundly wrong about the final dispensation:

Drink driving charges against an American woman have been dismissed based on an unusual defence: her body is a brewery. The woman was arrested while driving with a blood-alcohol level more than four times the legal limit in New York state. She then discovered she had a rare condition called "auto-brewery syndrome", in which her digestive system converts ordinary food into alcohol, according to her lawyer, Joseph Marusak.

We are aware that this can indeed happen.

The rare condition, also known as gut fermentation syndrome, was first documented in the 1970s in Japan, and medical and legal experts in the US say it is being used more frequently in drink driving cases.

We're even aware that that first known case concerned an American man in Japan and boy, didn't he have a hard time proving it.

During the long wait for a diagnosis appointment, Mr Marusak arranged to have nurses monitor his client for a day to document she drank no alcohol, and to take several blood samples for testing. "At the end of the day, she had a blood-alcohol content of .36 without drinking any alcoholic beverages," he said. He added the woman also bought a Breathalyser and blew into it every night for 18 days, registering around .20 every time.

Clearly, this is not the woman's fault so yes, we entirely agree with the idea that all charges should be dismissed. We are rather in favour of the idea of mens rea after all. However, this to us seems entirely wrong:

The woman is now free to drive without restrictions

Because we don't in fact have laws against drinking before you drive. This is not some puritan (however often people seem keen to take it in that direction) restriction of the joys of booze. This is law against driving while drunk, on the very sensible Millian grounds that in doing so you are a danger to others. And it doesn't matter how one becomes drunk, one is still that danger.

So the correct answer here is that, without fault of course there should be no punishment. But if ingesting carbohydrates is going to get someone pissed (which is the specific problem here) then someone to whom this happens should not drive: because they're pissed.

Someone could have gone blind from indulging too much in teenage manipulation, they could have gone blind as a result of unsuccessfully defusing a terrorist bomb and saving many lives in doing so. We still don't let them drive: because they're blind. They why is not the point, the danger is.

It would appear that our Chancellor does not understand microeconomics

This should not be taken as a good sign really. Evidence that the person setting the economic policy for the Kingdom doesn't quite understand economics shouldn't be so taken:

Airport retailers could be forced to pass on millions in VAT discounts on duty free to passengers under a review announced by George Osborne. The Chancellor said that it is "simply unacceptable" that some retailers are failing to pass on savings to customers and instead using VAT relief as a "windfall gain".

For the shops don't end up with that extra cash as a windfall or profit. It actually all flows through to the landlord in rent. As it will in any such situation of course.

In fact, it's been said that Heathrow should actually be paying planes to land there they make, as an airport, so much money from funneling people through the shopping areas.

That there's a tax discount, or should be, is true, but given that it is only available on a few select pieces of land then the benefit of it is going to flow through to those who own those few select pieces of land. David Ricardo published 198 years ago: we should all understand this by now.

Steve Masty: an obituary

Stephen J Masty, a longtime friend of the ASI, died on December 26th in London. He was one of the first friends I made when I taught philosophy and logic at Hillsdale, and was one of my most engaging and witty students. He went on to study at the University of St Andrews, and came down to help us out in the early days of the Institute. He was a talented cartoonist, and designed some of our graphics.

He moved to D.C. to work as a columnist with the Washington Times and as a speechwriter to several key Republican leaders. He was noted in the D.C. political and media community as a talented writer and witty raconteur.

He did a spell in Afghanistan with the Mercy Fund, producing leaflets and cartoons to help people, especially children, cope safely with the dangerous debris left after the Soviet withdrawal. He went on to spend much of his adult life as a development expert, working on projects in South Asia and Africa, as well as in the Middle East. He wrote and directed development movies, and one of his privatization video songs, recorded by local celebrity Captain John Komba, reached the top of the Tanzanian music charts!

In the early 1990s he managed the American Club in Peshawar, accompanying on his guitar some of the satirical songs he had written. He became a legend in the region, as he later did in Kathmandu, for his eccentric charm and bonhomie.

When in the UK, he made the Savile Club his home, and was well known and well liked by the other members. Some of his cartoons of them adorn the Club's walls, alongside pictures by Augustus John and others. He wrote novels, children's cartoon books, and movie scripts, and eventually took out British citizenship. It was characteristic of him that he had a letter in the Times that very week complaining about "foreigners coming to take our jobs!"

He led a colourful life, surviving a Taliban siege of Kabul and an earthquake in Kathmandu. He leaves us with many fond memories of good times spent together. The ASI has lost a talented and valued friend.

(the photo shows Steve in DC between two other ASI supporters)

An entirely vain hope but here goes anyway

We are undoubtedly all going to have the most hugely enjoyable slanging matches over this upcoming European Union referendum. But would it be possible, we ask politely, that such arguments stay with what is in fact true rather than just wander off into whatever sort of nonsense makes rhetorical sense? For we do think that we're more likely to end up with a reasonable policy in the end if we do in fact continually refer to reality rather than whatever phantasms sell a particular position. And please note, some of us here have very definite opinions on this matter, perhaps opinions not to your taste. But we'd still prefer to walk through, talk through, what is rather than what is not.

Which brings us to this remarkable claim by Sir Victor Blank this morning:

As a member of the EU, our companies are able to sell, without barriers and tariffs, to a market on the UK’s doorstep of 500 million people. They need only abide by one set of regulations covering the entire, vast and complex region. Our biggest trading partner is the EU. As a non-member these same companies could be obliged to negotiate with each individual country they sell to within the EU. One set of rules would be replaced by a possible 27, not to mention payment of duties.

There is absolutely no truth to this whatsoever. The EU is a customs union. This means that once over the import rules into the EU, goods and services are then subject to just the one set of rules and regulations: those of the EU's single market.

Entirely true, Brexit might mean that UK exports to the EU then faced import duties, they would indeed need to meet the rules of those 27 countries. But those rules would be as they are today: instead of one set of rules covering 28 countries ourselves included, it would be one set of rules covering 27 countries not including ourselves. Our leaving will not break up that single market at all, even if it produces a hurdle that must be leapt before entering it.

As up at the top, various of us here have various views about the EU and all who sail in her. But could we please make sure that whatever arguments are used by either or any side actually have at least some grounding in reality?

The current rules about trade into the EU are governed by EU law, one law for all. This will remain so whether Britain stays or goes: there will still be just the one set of laws about who may trade what and how over the borders of the EU.

We really need to get this story about rivers and flooding straight

That there's terrible flooding in the North of England is true. But before we decide what we're going to do about prevention in the future we do need to work out why there is terrible flooding. And here there's two very different tales. One is that this is climate change and so we had all better stop driving anywhere and huddle in the gloaming of low wattage lamps as we proceed, full speed, to the middle ages. The other is that the bureaucrats have been deliberately designing the flow of rivers so that floods do occur. We are not so cynical that we would insist that the second explanation must be true just because bureaucrats. We are sufficiently cynical to think that it could be the correct explanation.

Here is one such bureaucrat on the BBC:

Speaking to Radio 4's Today programme, Mr Rooke said the UK was moving from a period of "known extremes" of weather to one of "unknown extremes" - something which a government review of flood defences would consider before reporting next summer. Asked if the UK needed a new response to flooding, he said: "I think we will need to have that complete rethink and I think we will need to move from not just providing better defences - and we've got a £2.3bn programme to do that over the next six years - but also looking at increasing resilience." This would mean "when properties do flood, that they have solid floors, waterproof plaster, more electrics up the wall - so that people can get into their houses and businesses more quickly".

Quite clearly, more flooding because climate change and we'd better just make waterproof houses and just live with it. There's also someone called Gaia Vince (surely a spoof name, this is Mr. Cable in retirement, no?) in The Guardian telling us much the same thing. We've also a Dutch expert telling us that we should be changing what we do with rivers:

When more than 1,800 people died in the wake of the 1953 North Sea flood in the Netherlands, the national reaction was: never again. The resulting Delta programme to close off the south-western river delta from the sea was so bold that its name became synonymous with dealing with a crisis. If an issue needs a major response, you can be sure that a Dutch politician will call for a “Delta plan to tackle X”. It is time that the UK took some of that attitude and got a Delta plan to tackle flooding.

Sounds like a plan really. We're on board with it. And then comes this, about the earlier Cumbria floods:

Amid all the devastation and recrimination over the floods in Cumbria hardly anybody mentions one factor that may not be the sole cause, but certainly hasn’t helped.

That is the almost complete cessation of dredging of our rivers since we were required to accept the European Water Framework Directive (EWF) into UK law in 2000.

Yet until then, for all of recorded history, it almost went without saying that a watercourse needed to be big enough to take any water that flowed into it, otherwise it would overflow and inundate the surrounding land and houses.

Every civilisation has known that, except apparently ours. It is just common sense. City authorities and, before them, manors and towns and villages, organised themselves to make sure their watercourses were cleansed, deepened and sometimes embanked to hold whatever water they had to carry away.

Christopher Booker and Owen Paterson have said much the same thing about the Somerset Levels floods of a couple of years back: given that that area is below sea level drainage and pumping is really rather important. So what's changed?

But all this changed with the creation of the Environment Agency in 1997 and when we adopted the European Water Framework Directive in 2000. No longer were the authorities charged with a duty to prevent flooding. Instead, the emphasis shifted, in an astonishing reversal of policy, to a primary obligation to achieve ‘good ecological status’ for our national rivers. This is defined as being as close as possible to ‘undisturbed natural conditions’.

‘Heavily modified waters’, which include rivers dredged or embanked to prevent flooding, cannot, by definition, ever satisfy the terms of the directive.

So, in order to comply with the obligations imposed on us by the EU we had to stop dredging and embanking and allow rivers to ‘re-connect with their floodplains’, as the currently fashionable jargon has it.

We don't claim that this is absolutely right as an explanation. We're willing to admit that there might be the occasional subject upon which we are not entirely perfectly informed. But we most certainly think that it is an entirely possible, could even be probable, explanation. Flood plain management changes, we get lots more floods. Not a huge logical leap to think that there might be a connection.

The solution might therefore be to go back to managing the landscape as our forefathers did. Oh, and stop building on flood plains as the current planning system encourages. That is, as is so often true, the correct solution to a problem that government claims it is trying to solve is to stop government doing the damn fool things it is already doing.

It's remarkable how often that is the correct answer.