Redistribution: Not if, but how

Many people assume that classical liberals are ardently opposed to redistribution of income in principle, and that this usually overrides other concerns. It is certainly true that we are sceptical of it, but many of us are actually very relaxed about it in principle, and reserve most of our scepticism for the way it’s done.

Consider three different education systems. 

In system one, the government spends £6,500 per year per child through a centrally-managed school system where many aspects of the curriculum are decided by the Secretary of State for Education. In system two, the government gives parents a voucher for £6,500 per child to pay for their education in any school they like. In system three, parents are legally required to send their children to school but they do not receive any money from the state to help them do so.

Or three different healthcare systems. 

In one, we have an government-run and -provided National Health Service. In two, the government pays for health insurance for people too poor to afford it, but the private sector provides the care. In three, you’re on your own.

In both examples, system one is what we’ve got at the moment. System two is what I would characterise as a moderate classical liberal stance. System three is what I would characterise as a hardcore libertarian stance. 

People like Milton Friedman and FA Hayek spent most of their lives advocating system two-like policies, and these are generally the sorts of policies that the Adam Smith Institute and Institute of Economic Affairs advocate for too. 

If the state ended up spending less money under these policies, this is incidental to changing the way money is spent. The real goal is decentralising decision making to the level of the individual, and allowing firms to profit by satisfying people’s individual needs efficiently, and fail when they do not do so. 

I think a similar approach makes sense for welfare. The system we have at the moment is highly complex and relies on the people who run the system being near-omniscient about what’s best for people on benefits. That’s why I’m in favour of radical simplification of the welfare system along the lines of straightforward cash payments to the poor. Even if that means not cutting the welfare bill.

Redistribution isn’t costless, especially when it’s done badly. Taxes on the incomes and savings of the rich depress investment, and hence economic growth – making the pie smaller overall. On the other hand, taxes on consumption seem much less economically harmful. Again, the focus for me is on making the state cause less harm in the redistribution it does.

Does this mean I don’t want a ‘small state’? I’d say no.

The scope of the state is much more important than the simple amount it redistributes by. A government could raise very little tax, but still prohibit alcohol, tobacco, cannabis and any sex outside of the missionary position. This would be a much bigger state than a very liberal one that nevertheless had a £10k basic income – at least in the sense that it matters. 

Thatcher’s reforms revolutionised Britain not because they cut state spending as a percentage of GDP, but because they got the state out of key industries and opened them up to competition. It was rolling back the scope of the state that mattered.

So I don’t think it’s incoherent to say that you’re a pro-redistribution classical liberal. In principle, I don’t mind redistribution. The problem is how bad the state is at it.

Sorting out the bank holiday mess

British public holidays do not fall evenly.  We have far too many in the Spring when the weather is unreliable, and none at all in the Autumn when it tends to be more pleasant.  Good Friday, Easter Monday, the early May holiday and the late May holiday come thick and fast.  Then there is nothing until the late August holiday, and then a complete desert until Christmas Day.  And we have fewer holidays than many other countries.

We could rectify both problems by a simple measure.  We should abandon the early May holiday, a Socialist workers' day that celebrates the promise of Spring planting, unlike the capitalist American Labor Day which celebrates when the harvest is in.  In return for its loss, we could trade it for two new holidays.  One could fill the Autumn desert as Trafalgar Day, October 21st, which could for convenience be the third or fourth Monday in October.

The other new holiday could be June 24th, with chance of better weather than early May.  And we could make it a UK Thanksgiving Day to celebrate our independence as a nation.

Six reasons why Civitas and Peter Saunders are wrong about housing

Civitas has a new paper (pdf, reports in The Observer) on housing out today by sociologist Peter Saunders, with some surprising conclusions. Saunders argues that demand stimulus—open credit markets, foreign investment, immigration and increased housing wealth itself—has driven house prices up, breaking their historic link with prevailing wages.

He argues that the solution to this problem is rolling back Help to Buy and other demand-side subsidies, as well as a change to monetary policy requiring the Bank of England to target house prices, and a new round of Right To Buy, but this time applying to private properties as well as council houses. Help to Buy is a bad policy, and demand for housing has risen, but outside of these, Saunders is deeply wrong about practically every claim in his monograph, and his proposed policies would be disastrous, a bizarre proposal to centrally control the pricing mechanism in a key industry, coupled with legalised theft.

Here's why Saunders is wrong:

1. Throughout, Saunders compares house prices to wages. But house prices are more like human capital—an asset that produces a steady stream of some desirable output; shelter or labour. Since it's hard to put a number on the value of someone's human capital, he'd be better off comparing the cost of servicing a typical mortgage to wages, since this is what you actually need to afford with your wages. By this measure, things look very different; mortgage payments are where they typically have been, at around 20% of income.
2. Saunders thinks that these homeowners will get a big shock when interest rates rise and their mortgage payments jerk up. For one thing, many mortgagors have fixed rate mortgages, which will stay stuck. But for another, expectations of low future interest rates are precisely why house prices have risen so much—markets and home buyers are pricing in a (reasonable) guess that market interest rates are not just low now, but will be for a long time. Indeed, this is why the situation for those on tracker mortgages (those linked to the Bank's base rate) is not as different as many people think. The payment rates are tied to the BoE rate because lenders and borrowers both (reasonably) believe that market rates and the Bank rate are driven by the same factors. Both the Bank and market lenders push their rates up when prospects improve, and down when they worsen, more or less.
3. Saunders claims that wide homeownership is a particularly good way to encourage wealth-accumulation across society. But there is good evidence that homes are no better than any other assets—holding shares in a FTSE100 tracker, for example, is just as good.
4. Giving the Bank of England a secondary goal, targeting the ratio of house prices to wages would be utterly bonkers, requiring them to crash the rest of the economy to meet an arbitrary aim they have very little direct control of. As we saw at the beginning of the crisis, the prevalence of tracker mortgages is contingent on Bank of England rates being set for other reasons. If the Bank tried to target the price of housing through the link between many market interest rates and its own base rate the link would be severed—a classic example of Goodhart's Law. But even if it could have a major influence on either side of the equation, it would be crazy to set interest rates and QE too high or too low for the rest of the economy, and risk a dangerous boom or costly bust overall, to try and centrally plan the prices in one particular market.
5. Saunders is wrong that supply is irrelevant to high rents, mortgage repayment costs, and the related high house prices. Usually high prices drive firms to open up shop, increase supply, and drive down prices through competition to gobble up the profits. This is why we have pricing! Markets are about demand and supply. But in the housing market incredibly strict regulations stop this. And we have high quality econometric evidence backing this up: house prices would be 35% lower if there had been no regulatory constraints on housebuilding 1974-2008.
6. A right to buy council housing and right to buy private rental housing are completely different things. One is a privatisation scheme, very generous to its beneficiaries. One is legalised theft. I have a house, you rent it and want to buy it for a price a bureaucrat deems appropriate; I value it more than that price and would not like to sell it. On Saunders scheme I have no say over my own property. Yes, this would drive down the price of housing—by trampling over hundreds of years of established property law—but it would only drive it down because it makes housing genuinely less good of a thing. Not everyone wants to own right now. Moving house when you own is vastly more costly and not everyone wants to stay where they are now forever. Landlords provide a valuable service, and smashing that market to bits would drastically worsen the UK housing situation.

There are real solutions to our housing problems. We need to liberalise planning, both in scale and scope. That's pretty much it. Nothing but building more houses will work.

Norway, José?

Some commentators have argued that, should voters choose to leave the EU, they will mostly be motivated by an objection to immigration. This would make the EEA Option, which we have argued for, a non-starter, since in order to be a member of the EEA the UK would have to keep freedom of movement. 

Others, like Jonathan Portes, have argued that even if a majority chooses to leave the EU, a majority may also wish to remain in the single market. The vote is on whether we leave the EU or not, and even if many leave voters are motivated by an opposition to freedom of movement, they may not be a majority of the country as a whole.

A new YouGov poll, commissioned by the Adam Smith Institute, asked 1,751 people three questions: whether they wanted immigration or trade to be a post-Brexit government's first priority; whether they thought the government should consider a Norway-style deal (i.e., whether it would be democratically legitimate for a government to do so); and whether they themselves would support such a deal.

We found that 54% would support the Norway option, compared to just 25% opposed, and 57% would like the government to at least consider such an option. Voters were split evenly on whether immigration or trade was a bigger priority, though there was not majority support for either.

Our results:

The full results are here.

It's important to understand what's gone wrong in Venezuela

That Venezuela was a middle income country that is now descending into chaos and penury is true. But the important thing to note is why this is happening. We're now seeing food riots in those parts of the country which were supposed to be benefited by the policies being followed:

“There have been 37 presidents of this country and none of them led us to this,” an elderly woman yelled at a policeman. The officer replied: “We are suffering too. But there’s no food here. Go home.”

Veronica Gonzales, 46, a computer technician, said that police and the colectivoswere in league with black marketeers known as bachaqueros, or leaf-cutter ants, who queue at shops and then sell the produce at inflated prices. “They are all a mafia,” she said.

What is striking is that the riots — sometimes half a dozen a day in the capital — are in working-class slums far from the middle-class areas where support for the opposition has traditionally been strongest. The opposition, which controls congress, is trying to push through a referendum to remove Mr Maduro but that will take time and hungry people are more concerned about procuring food.

To put an end to the vast queues and black marketeers the government recently started distributing food directly to local community councils.

It is not socialism that has caused this. And no, we don't mean in the sense that true socialism has never been tried so we can't say that it is at fault. Socialism is where it is not the capitalists but some more communal group which owns the productive assets. Both the Co Op and Waitrose in our own food market are socialist enterprises. One is owned by the customers, the other by the workers in it. They both seem to work just fine within the strictures of market competition and the price system.

And it is that which Venezuela has got wrong: that market and prices thing. As Mises pointed out and Hayek developed we simply do not have any method of coordinating anything as complex as an economy without making use of those prices and the market. Actually, as the only Soviet economist, Kantorovich, to win the Nobel concluded himself, we have to start with market prices before we can do anything else.

This disaster is because people think that prices are just arbitrary numbers we can assign near at random. Not so: they are the vital information about who wants what and which resources and where should be devoted to producing those things.

This has obvious implications for us in our rather better position. We're not in favour of more council housing for example, thinking that private ownership produces a better result. But that is a minor point compared to the important one, that whatever we do with housing or rents we must let the price system work: that means no rent control. Similarly we're not worried whether people prefer to work in a socialist workers' cooperative or a more capitalist firm. But we must run our welfare system by redistributing income rather than ruining the price system with a minimum wage.

The end result here, the thing we must all remember, is that there are indeed variations among various parts of the spectrum between capitalism red in tooth and claw and yes, even workable socialisms. Those working socialisms must be voluntary, of course, but we can see them working right here at home. How collective action is organised is very much less important than the insistence that all must be subject to the strictures of the market. Which is what Mises and Hayek were saying: markets not planning indifferent to prices.

For the truth is that non-market systems simply do not work as economic systems. And working, being able to sate at least some human wants and desires, is the main thing we want from an economic system. Thus, whatever else we do we must be market based.

We know that richer people live longer: but is it because they are richer?

A standard part of the story here in this sceptered isle is that there is a causal relationship between economic inequality and health and lifespan inequality. Michael Marmot has been telling us this for decades now. That there is a correlation between wealth and lifespan is obviously true: but what's the causality? 

What we'd really like to do is look at people who have randomly gained wealth and see whether it has changed either health or lifespan. And just to be inclusive about this we'd like to look at the children of those this happens to. Fortunately the spread of lottery systems around the world gives us some number of people who have randomly become wealthy.

Via Marginal Revolution, the result? 

We use administrative data on Swedish lottery players to estimate the causal impact of substantial wealth shocks on players’ own health and their children’s health and developmental outcomes. Our estimation sample is large, virtually free of attrition, and allows us to control for the factors conditional on which the prizes were randomly assigned. In adults, we find no evidence that wealth impacts mortality or health care utilization, with the possible exception of a small reduction in the consumption of mental health drugs. Our estimates allow us to rule out effects on 10-year mortality one sixth as large as the cross-sectional wealth-mortality gradient. In our intergenerational analyses, we find that wealth increases children’s health care utilization in the years following the lottery and may also reduce obesity risk. The effects on most other child outcomes, including drug consumption, scholastic performance, and skills, can usually be bounded to a tight interval around zero. Overall, our findings suggest that in affluent countries with extensive social safety nets, causal effects of wealth are not a major source of the wealth-mortality gradients, nor of the observed relationships between child developmental outcomes and household income.

Doesn't seem to be the money itself, does it? And thus is won't be economic redistribution which solves the point either, will it? 

As we've been saying for some time now, health and mortality inequality is about migration

One of the stylised facts of the UK is that there's a large health and mortality gap. Michael Marmot and others continually tell us that this is because of social and economic inequality. We keep trying to point out that this is not quite so. For people are never measuring either the health nor lifespan of where people come from. Rather, mortality and lifespan are measured in the place where people drop dead. This has an obvious implication: given that people do migrate we are to some extent seeing people self-selecting into poor and richer areas. And we know very well that richer people live longer.

Interestingly, there's new evidence coming out about Glasgow. The poorer areas of that city are continually held up as evidence of Marmot's contention: economic inequality leads to that health inequality. However, this newer point rather supports our contention:

The mystery of Glasgow’s “sick man of Europe” status started to rear its head more than half a century ago. But now, for the first time, researchers from the Glasgow Centre for Population Health (GCPH) claim to have found hard evidence of a number of key factors that explain it.

In a new report, History, politics and vulnerability: explaining excess mortality, they claim a combination of the historic effects of overcrowding, poor city planning decisions throughout the 1960s, 70s and 80s and a democratic deficit – or lack of ability to control decisions that affect their lives – are among reasons why Glaswegians are vulnerable to premature death.

The research has been endorsed by some heavy hitters including Sir Harry Burns, formerly the chief medical officer for Scotland, Tom Devine, professor of history at Edinburgh University, and Oxford University geography professor Danny Dorling. But the findings are not about eating fewer chips and stopping smoking; they are deeply political.

According to Chik Collins, co-author of the report and professor of applied social sciences at the University of the West of Scotland, new research about “skimming the cream” of the city’s population to rehouse its “best” citizens in new towns, is particularly striking.

The research based on Scottish Office documents released under the 30-year rule shows new towns such as Cumbernauld, East Kilbride and Irvine were populated by Glasgow’s skilled workforce and young families, while the city was left with “the old, the very poor and the almost unemployable”.

One way to read this (and we do not insist that this is all of it but do insist that this is some of it) the mortality rates and lifespans of that total population haven't changed at all: or more likely have increased along with more general rates across the population. But that section of the population which always did have those lower lifespans has been left behind in those poorer areas and that which always had the longer have moved out.

This is much the same as noting that Bournemouth (and the archetype, Frinton On Sea) has a longer average lifespan than much of the country. But these are retirement towns, where many people only move there upon retirement. Those who are still alive at retirement age and also have the financial resources to move at that age do indeed have a longer lifespan than the population average.

We are equally certain that this explains at least some of the Case and Deaton finding about lifespans in America. Poor rural whites appear to have falling average lifespans, especially in Appalachia. Other studies of these areas point out that anyone who manages to get into college from these areas does so and then doesn't come back. The population is self-sorting into different geographic areas. With those staying being those who always did have the lower lifespans: but that's what we're now measuring in those areas. Andrew Gelman, who is investigating these numbers in detail tells us that this theory is not wrong but has not yet been shown to be right (or, if you prefer, has not yet been shown to be wrong).

We really are pretty sure that this is at least part of the explanation, as with Glasgow. Those who always did have longer average lifespans have left the area: the average lifespan of those remaining is no lower than it ever was, it just looks that way as we're now only measuring a subset of the original population.

Roland Smith reviews "Towards an Imperfect Union"

Over at Medium, ASI fellow Roland Smith, and author of the Liberal Case for Leave, Stuck in the Middle with EU, and Evolution, Not Revolution, has written a review of Dalibor Rohac's Towards an Imperfect Union: A Conservative Case for the EU. Rohac is a research fellow at the American Enterprise Institute and recently presented his book—and his case—in a lecture at the ASI.

He finds a lot to like in Rohac's book, but ultimately goes away disagreeing with his view as strongly as you might expect. A representative paragraph:

The more general and more important point that I think is glossed over in the book is that euroscepticism has partly arisen because the EU has gone too far ahead with integration. That point doesn’t really come out from the book and in true pro-EU fashion, Rohac sees the solution as a matter of working further with the existing EU design in order to get it right. Of course if one believes that the EU went off course around 1990 thanks to hubris, then one will also believe that such a redesign “back to original (Hayekian) principles” is possible.

Read the whole thing!

The art of electoral politics

There is an art to this whole idea of electoral politics. Which is to identify what certain sections of the voting public desire and then promise it to them. Identify enough such groups, promise them enough, and you will be elected. A lovely example of which just in from the Australian Green Party, who are suggesting that there should be a living wage for artists.:

If the Australian Greens have their way, the nation's creatives will be more likely to be able to afford food, rent and maybe even heating under its plan for a living wage for artists.

In more detail they're really saying two things:

Given the insecure nature of employment in the arts, many artists will at one point or another in their career find themselves unemployed and in need of income support. During these times, work done to perfect their craft will increase employability in the future, but it currently goes unrecognised by the social security system. Furthermore, the requirement to spend time complying with extensive Centrelink mutual obligation requirements leaves less time to develop skills.

Time spent doing art will qualify as seeking work for the purposes of being on the dole and:

The Greens have previously announced that we will support artists’ incomes by investing $20 million over four years into a fund so that organisations can pay artists fees for works that are publicly displayed, loaned to a non-selling exhibition or used on other occasions when art is shared with the public.

Artistic work that people will not voluntarily pay for should be paid for by a compulsory levy on all taxpayers.

Even in urban Australia we don't think that starving artists who wish to continue to bludge their way through life are a significant voting bloc but who knows? Still, this is a good delineation of that whole art of politics thing. Assemble enough such groups and promise them enough and you too can get elected to dine off the taxpayers' cash while distributing it to those who vote for you.

One point we would make though, one piece of advice. The real trick is to do this efficiently, to only bribe those who might but probably won't vote for you rather than waste resources on those who will come what may. And won't most of the low end artistic community be voting Green anyway? 

Thus this particular plan is a waste of money. Even from the political point of view.