There's a solution to this

If the NHS is not working as we would wish it to work (and there're few who would argue that the current situation is perfect) then obviously there's an argument that the way that the NHS works should be changed. Which brings us to two surprises, the first that the head of 38 Degrees agrees with us on this matter. The second that he doesn't see the obvious answer:

Politicians have failed the NHS. We need people power to save it

David Babbs

If the politicians have failed it then perhaps the answer is not to have it run by politicians?

Conventional politics has failed us when it comes to the NHS.

If that is so then conventional politics is the wrong system to be using to run the NHS then, isn't it?

One thing is certain: we know that when we leave the politics of the NHS to the politicians, it doesn’t end well. Now, more than ever, people-powered campaigning is critical to the future of the NHS.

The ultimate people power is of course people spending their own money in a marketplace. There will obviously be subsidy to those who simply cannot afford the treatments they need - as with France, Germany and many other advanced countries. It would even be possible to suggest the Singapore system. A combination of government catastrophic insurance and medical savings accounts for routine expenses. A system which provides health care as good or better than the NHS at half the cost.

But the central point being made seems obvious to us as well. The system of the politicians at the centre doling out the health care doesn't work as we would wish the system to work. The answer therefore is simple, move to a system which doesn't have the politicians at the centre doling out the health care.

Not a lot of people know this about insurance

It's generally true that we expect, in a competitive market, insurers to lose money by writing insurance. That's something which not a lot of people know nor realise. But understanding the point will aid in understanding what the latest complaint about the market is for car insurance.

Motorists are facing higher insurance premiums even though the industry is saving millions of pounds thanks to Government imposing curbs on whiplash claims.

Drivers have seen the cost of insuring their cars rise by up to 20 per cent - adding £115 to the cost of a policy.

But at the same time the insurance industry has saved around £520 million because of a dramatic drop in personal injury claims, The Times reported.

The changes which led to it being more difficult to claim for whiplash were supposed to have saved everyone £90 a year on their premiums. Whiplash has become more difficult to claim for yet premiums are rising. Cue capitalist rip offs and so on.

However, now add in that we expect insurers to lose on their underwriting books, the actual process of writing insurance, the difference between premiums paid in and claims paid out.

The reason for this is that there's a timing difference between the two. That gives the insurance company a large pile of money to play with. And play with it they do. The go and invest it in nice, safe, and short term, investments in The City. This brings them an income, of course.

As these things happen in competitive markets that second income is important. Because there's always going to be one or another insurance company which notes that they can gain more of that cash pile to invest by cutting premiums. And so the general return to capital in the business reverts to the general return, risk adjusted, across all business. That means that the investment returns subsidise the insurance premiums. 

Another way to say the same thing is that the two income streams must, in a competitive market, end up as amounting to that general return on capital, so one of the two will subsidise the other.

We can and do use this as a measure of whether an insurance market is competitive (and also some other businesses which get such a cash float, like futures broking, possibly retail banking). If the underwriting, the provision of the basic service, isn't loss making in the face of the investment returns then it's not a competitive market.

Now change what those investment returns are. Safe, short term, investments in the City now yield pretty much nothing. Thus the float isn't making a great profit, thus the losses on underwriting are not being subsidised as they were. Thus prices across the market are rising to consumers.

It is, of course, possible that they really are collaborating to rip off the consumer. But it's almost impossible, from prices alone, to tell the difference between a perfectly functioning and competitive market and a perfectly operating collusion. Prices will still move in lockstep. When we see this happening we thus need to really investigate said market.

And here with car insurance the test will be. Are the insurers making more than the general return on capital, adjusted for risk? If not then the likely explanation is that fall in investment yields, reducing the subsidy to premiums.

We'll leave to those with the further interest the task of going and reading the financial results of the insurers. But that is where the answer will be found. Only if that return on capital is out of step would further investigation be warranted.

Don't give index funds the finger

Are passive investors worse than Marxists? These are people who buy index tracker funds to invest in a whole financial market, instead of trying to pick individual firms to invest in.

Allister Heath has an entertaining and mischievous piece today, inspired by a recent investor’s note, which toys with the idea that they might be a problem. Though he (correctly, of course) concludes that “Marxism is always worse than everything else, including of course trackers”.

But are they really a problem at all? I think not. The case against them can be summarized like this: since passive investors don’t move their money out of bad firms, and don’t raise their voices against bad executives at shareholder meetings, they misdirect capital and effectively subsidise bad firms. They follow the herd and when they do succeed, it’s because they’re free-riding on the efforts of active investors.

Worst case scenario: if they were the only kinds of investors, there would be stasis. Capital would be completely locked up in bad firms and financial markets would grind to a halt. Capitalism as we know it would be over – hence the comparison with Marxism.

But in this worst-case scenario we can see why (a) this would never happen and (b) passive funds’ supposed flaws aren’t problems at all. Indeed, as well as free-riding on active investors, passive investors subsidise them too.

Consider a world where nearly all capital – 99% – was invested by algorithmic passive index funds, and the other 1% was invested by very lazy “active” investors. In this world, a certain phone company has a market cap of £10bn – at the point at which the last genuinely active investor left the market, its future profits and assets were reckoned to be worth £10bn in current-day terms (for that is what determines a company’s share price).

But something unexpected happens to boost the firm’s future profitability – the firm developed some new technology that made its phones cheaper to build, say. In a world of active management, that would cause new, properly active investors to buy the now-undervalued shares held by the lazy “active” investors, bidding the price up until the firm’s total value reflected its newfound expected profitability, and moving capital into that firm from other firms or investments which are now relatively less profitable. Passive funds, of course, would follow suit by design.

In a world where there were zero active investors, of course, this wouldn’t happen and the firm’s price would be stuck at a too-low level. But as long as there are some people willing to enter the market when the returns are big enough, that too-low level would induce non-investors to enter the market as active investors! Get-rich-quick schemes would, here at least, really work. Buy some shares at just above the market price but below its ‘true’ value, either from a fund or from the firm directly through a new share issuance, and you’ve made potentially quite a lot of money overnight. Easy.

The reverse would work too. If the firm had lost value – maybe its phones unexpectedly became unfashionable with consumers, or its board was just managing it badly – something similar would happen as profitable short-selling drove the price down and down.

In other words, if and when passive investments became inefficient, that inefficiency would create an incentive to become an active investor.

Clearly, barring legal barriers to entry, a world of all passive investors is impossible for long. To the extent that this happens in our mixed market – with passive investors slowing down stock price movements, perhaps – the subsidy is there for active managers who spot and act on changes in firm value before the others. The more passive investors, the greater the returns for the active investors.

All this reminds me of a paradox of efficient markets. If markets were 100% efficient, there would be no money to be made in active investment. But if there was no active investment, markets wouldn’t be efficient. So the equilibrium is somewhere in-between – and just where you think that equilibrium is probably determines whether you want to invest by picking winners, or be passive and let others do that hard work.

Do passive investors free ride on active investors, or do they subsidise them? Yes.

Less regulation means shorter recessions

In recent years, many economists on the left of the political spectrum, such as Joseph Stiglitz and Paul Krugman have argued that laissez-faire policies have made banking crises (like the Global Financial Crisis) more likely.

But, even if this were true is it a mark against them? It depends. As Scott Sumner points out not every banking crisis becomes a recession. Indeed, one study by Dwyer et al, found that one in four banking crises didn't lead to a fall in GDP per capita in the following two years. And countries that experience occasional financial crises typically grow a lot faster than countries with more stable financial conditions.

What matters then, is not the likelihood of a banking crisis, but whether an economy is more or less likely to make a quick recovery.

According to a working paper by Christian Bjørnskov, economies with greater levels of economic freedom (in particular greater levels of regulatory freedom), recover faster and more likely to stop an economic crises from becoming a recession. Looking at 212 crises across 175 different countries, he found that countries with high levels of regulatory efficiency (as measured by their score on The Heritage Foundation's Index of Economic Freedom) tended to have shallower and shorter recessions.

Why might this be? Bjørnskov gives a few possible reasons.

"As a crisis hits an economy, a substantial share of resources become unemployed, which creates profit opportunities for entrepreneurs to the extent that these resources become cheaper. Yet, whether or not this happens and at which speed existing firms and new entrants can reallocate resources depends on the regulatory framework.

Licensing requirements and similar business regulations constitute entry barriers that prevent entrepreneurs from seizing legal opportunities and thereby limiting the economic and social losses during crises. Unstable monetary policies and inflationary interventions prevent the formation of precise price expectations, thereby increasing uncertainty, which would also hold back new investments (Friedman, 1962).

Finally, labour market regulations can make it both more expensive and risky to hire new employees, providing a third channel through which deficient or inefficient regulations significantly increase the transaction costs of reallocation. Consistent with the evidence, this does not prevent a crisis from occurring, but limits its extent as more firms in a flexible economy can react faster and in a more economical way to the challenges and opportunities created by the crisis."

Recessions that forces business to cutback, lay off workers and even shut down may be painful, but they also allow for the creative destruction and dynamism that benefit us all. But it's only when regulatory barriers are low, inflation is predictable, and labour markets are flexible, that entrepreneurs can take advantage of those opportunities quickly enough to avoid a prolonged slump.

Shut down the war on drugs, not Fabric

After the tragic drug related deaths of two men recently, the nightclub Fabric has been forced to temporarily close its doors. Despite the club’s full cooperation with authorities- and its concerted efforts to clampdown on the sale of drugs on its premises- it might be forced to close down permanently.

Such a move would be devastating for London’s nightlife and music scene. Fabric is internationally renowned and attracts visitors from all over the world. It has also helped to launch the careers of world famous musicians and DJ’s. Closing down Fabric would also hurt the economy- it employs 250 people and many people travel to London in order to visit Fabric.

Not only would the forced closure of Fabric destroy the rich cultural tapestry of London and hurt the economy, it would also be incredibly unfair. Fabric is being punished as a result of the free choices of individuals. The club did not sell them the drugs or encourage them to take them- in fact they have tried repeatedly to clamp down on drug use and their staff offer support and advice to those who may have taken them- and yet Fabric is being punished.

The plight of Fabric serves to highlight the absurdity of the UK’s drug laws. People should be treated as free agents and be allowed to put whatever they please into their body without the State harassing them. Drug laws are an affront to individual liberty.

Drug laws are also ineffective and there is a plethora of research that strongly suggests decriminalisation has no real impact on levels of drug use. Furthermore, other studies reveal that decriminalisation has a positive impact, as it reduces the burden on criminal justice systems. Therefore, if decriminalisation would not result in more people consuming harmful substances, and if it would reduce the burden on the justice system, perhaps it is time to seriously consider decriminalisation.

In fact the prohibition of drugs exacerbates the problem as it results in the development of even more dangerous drugs. Crack cocaine and crystal meth, two of the most terribly destructive drugs, came into being as a result of the US government’s attempts to eradicate the supply of less dangerous drugs. Such a clampdown on cannabis led people to legal highs; any further legislation will force the market underground and will hand even more power to criminals, meaning more harmful substances being created and consumed.

Not only are drug laws in the UK and around the world ineffective and cumbersome, they are also inherently unfair and increase inequality. As a result of drug laws, prison populations in the UK and the US have a disproportionately high number of people who are black, young or poor – quite often all three.

Furthermore, drug prohibition hands power and money over to violent and odious criminals. This is particularly true with cannabis, which holds the largest share of the drug market. An example of this is provided by the impact of cannabis legalisation in some American states. As people can now buy cannabis legally, it has reduced the prices that drug dealers are charging. Decriminalisation has had a massive impact on the power and profits of Mexican drug cartels.

The government needs to seriously consider decriminalising drugs. If it did this, it would radically reduce the power of some of the most vile and detestable people around the world, decrease the burden on the already overstretched criminal justice system, and dramatically reduce the number of ethnic minorities and other disadvantaged people in prison.

Mary Berry doesn't therefore you must be banned from doing so

It's said that people become more conservative as they grow older - that liberal mugged by reality thing. It is perhaps possible to become too illiberal as this process happens:

Sugary drinks should be banned, Mary Berry has said, as she revealed that she refuses to give her grandchildren anything other than water to drink.
....
“I honestly think there shouldn’t be sugared drinks. All my grandchildren drink water all through the day. I’ve just had them to stay and at breakfast they have water. They don’t even know what sugary drinks are.”

How Mary Berry grandmothers her brood is of course up to Mary Berry. That's rather the point of being liberal. It's also fine that Ms. Berry urge others to do as she does. That's also that liberal free speech thing.

However, Ms. Berry does not boogie the night away therefore no one else should? Not that we know either way but Ms. Berry does not attempt legovers with interesting people she is not married to? Therefore the law should be changed so that none may? May Berry has only soup for lunch, as she tells us, therefore soup should be the only lunch for all Britons?

To examine the logic is to see how ludicrous it is if we are to maintain any pretence at all of being a free and liberal society. Our aim, in so far as there is an aim to governance at all, is to maximise the amount of what people desire to do, as defined by those people themselves. If that includes sugary drinks, bopping 'till they drop or the fruits of the sexual revolution well, that's just up to them.

It may be that Ms. Berry is only urging that parents and grandparents ban sugary drinks for their own brood(s). But there are very definitely others out there who would ban them for all.

There's a remarkably large number of things that distinguished ladies of a certain age do not do but which many others do and enjoy doing. Our actual ruling principle is and should be chacun a son gout.

We can't see how this works Young Owen, sorry, just can't see it

Owen Jones tells us several things about the current rail system:

If you live in London and urgently needed to make it to Leeds today, you would have to part with at least £98.70. A British Airways flight to Paris booked today, on the other hand, will leave you £62 worse off. The cheapest train to Edinburgh today costs £128.20. There are cheaper flights available to Madrid (£88), Berlin (£90) and Rome (£112). The proportion of British commuters’ pay packets spent on train tickets is up to issix times higher than their European equivalents.
As a 2013 report found, the state shells out billions more on public subsidies for railways than it did in the days of British Rail. And after inflation, overall public spending on the railways was an astonishing six times higher in 2013 than after privatisation in 1996.

Train tickets cost more in the UK than in many other countries. Quite true. That's because those travelling pay rather more of the cost of their travel than do people in other countries. That is, the general taxpayer pays rather less of the bill, subsidising the travel of other people. Which, we are really pretty sure, is the right way to be doing it. Those who get the service should be the people paying for it.

However, we also get told this:

The case for publicly run rail is popular, and for good reason. It would cost nothing to bring rail franchises into public ownership as they expire, and they could prove to be cash cows for the Treasury.

It's possible that the railways are, will be or could be profitable whoever owns them. It's possible that they are, will be or could be in need of large subsidy as they are not profitable, whoever owns them. But this is the bit we cannot understand. How can we describe something which requires large subsidy as being a cash cow? Doesn't compute, does it?

The difference between Mr. Chakrabortty and us on foreign aid

Aditya Chakrabortty tells us that it's very important indeed that the UK continue to shift 0.7% of GDP overseas as foreign aid:

No, if you want to see how far to the right our new prime minister will go, watch one area that most papers barely cover. Watch international development.

By development, I mean emergency relief for Syrians bombed out of their homes, healthcare for new mothers and their kids in Sierra Leone and school lessons for girls in Pakistan. Who could be against any of that? The answer is: no one in mainstream politics. It may have been Labour that pledged a target for government aid spending, but it was the Tory-led coalition that made that promise reality so that, of every £100 Britain earns, 70 pence goes to poor countries. That, David Cameron claimed on his last day at No 10, was one of his proudest achievements.

We agree entirely that aiding the poor in becoming rich is a moral imperative. We also agree that there's much that we can do to aid in this process. However, we are with Peter Bauer here, in that foreign aid is all too often taking money from poor people in rich countries to give it to rich people in poor countries.

We exclude from this disaster aid - although even there we insist that sending food which arrives well after the next harvest is not the way to deal with famine. Instead, send money to give to people to buy food. As Amartya Sen has pointed out, modern famines are not about a dearth of food, they are about an absence of effective demand. Let us solve the actual problem in front of us.

But aid as development aid? Again, let us solve the actual problem in front of us. Which is that poor people are poor because they produce little of value. Not just little of value to us but little of value to themselves or anyone else. The solution to that is to aid them in producing things of value. Economic development that is - or, as Madsen of these parts puts it, buy things made by poor people in poor countries. 

With Brexit now to happen there is a golden opportunity for us to aid in this:

Take the example of coffee. In 2014 Africa —the home of coffee— earned nearly $2.4 billion from the crop. Germany, a leading processor, earned about $3.8 billion from coffee re-exports.

The concern is not that Germany benefits from processing coffee. It is that Africa is punished by EU tariff barriers for doing so. Non-decaffeinated green coffee is exempt from the charges. However, a 7.5 per cent charge is imposed on roasted coffee. As a result, the bulk of Africa’s export to the EU is unroasted green coffee.

The charge on cocoa is even more debilitating. It is reported that the “EU charges (a tariff) of 30 per cent for processed cocoa products like chocolate bars or cocoa powder, and 60 per cent for some other refined products containing cocoa.”

The impact of such charges goes well beyond lost export opportunities. They suppress technological innovation and industrial development among African countries. The practice denies the continent the ability to acquire, adopt and diffuse technologies used in food processing. It explains to some extent the low level of investment in Africa’s food processing enterprises.

If we wish to aid developing countries in developing we should buy more of what they produce. And enable them to add more value to it to boot. The best thing we British can do is simply throw open our borders, entirely tariff free, to anything and everything made by poor people in poor countries.

There are those who insist that unilateral free trade causes jobs losses at home. They are wrong of course, that is nonsense, cheaper imports make us richer. But imagine they are right - what better use of the aid budget than enabling development overseas and compensating those who lose from it? 

This free market globalisation thing has led, in recent decades - and as we have pointed out many a time - to the greatest reduction in absolute poverty in the history of our species. We should be, if we do want to aid development, reinforcing what works. Which means opening up, tariff free, to those products of the poor. Once and only if the aid wallahs agree to that will we even start to discuss that aid target as something that might remain. Because only if they agree to that will we know they are being serious about wishing to boost development.

There is absolutely nothing new in the IFS gender pay gap paper

We all know that, on average if you count all men and women, men take home more money in pay than women. We also know that, on average, people who work sixty hours a week take home more than those who work thirty hours a week. And those in banking and law take home more than those in psychology and education.

The Institute for Fiscal Studies has a paper out today (pdf), which has been widely feted across the press, despite the fact that it simply repackages these facts with barely any extra analysis or information, though they do have some cool charts and graphs. I suspect they didn't tell the media that their data is no better than—and in my view a good deal inferior to the official Office for National Statistics numbers.

In their paper they show that there is indeed a raw gender pay gap, which is reduced substantially by various controls (like hours and having kids). They cut this up and display the data in some pretty cool ways below. But they don't mention that some pretty important facts have been left out of their narrative.

For example: do we think that all young men and women without children choose, on average, the same A-levels choices, degrees, and career paths? I'll answer the question: they don't. In the USA, 95% of the gender pay gap among new graduates is down to subject major choice—some degrees are more lucrative than others.

This, in turn, seems to be because men are more ruthlessly materialistic in major and career choice. And it reflects values men and women express in long, careful studies. Gender difference (whether socially constructed or genetically inborn, or most likely, a bit of both) predicts the world we see much better than discrimination.

When women do go into high earning, competitive fields, they do very well. In fact, one study found that women were more aggressively promoted, and earned more than men, so long as they didn't exit the workforce.

In fact, Harvard economist Claudia Goldin found (pdf) that the gender pay gap only existed in industries where there are increasing returns to hours: where 80 hours a week is worth more than double 40 hours a week, and where flexible hours are impossible for technical reasons. In these fields women were less productive because they chose to have a work-life balance that men avoided (and not just because of kids). Since they were less productive, firms paid them less.

Is this a bad thing. Well, it depends whether you think money and career success are the only important ends in life, and it depends whether you think that men and women have to have (on average) the same paths in life to have equally good paths in life. I don't think it's worse to work thirty flexible hours a week than it is to work six ten-hour days, and I think it would be dystopian to try and make everyone's careers similar.

What we want is equal work for equal pay, and according to our best analyses of the gender pay gap data, that's what we have. Today's IFS paper adds nothing to our understanding.