The Daily Mail’s actually right about NHS Wales here

It’s ever so slightly uncomfortable top be agreeing with the Daily Mail here as they’re being so nakedly politically partisan about the NHS, the Labour Party and Wales. However, it should be said that they’re actually correct in what they’re saying:

Today this paper publishes the first part of an explosive investigation which blows away Ed Miliband’s claim that his party can be trusted with the NHS.

Indeed, there is no need to imagine how the service might perform under Labour. For the evidence is before us in Wales, where the party has had full control of the funding and management of health care since devolution 15 years ago.

As Guy Adams exposes on Pages 8 and 9, a picture emerges of a Welsh NHS on the point of meltdown, in which the wellbeing and often the lives of patients are routinely sacrificed on an altar of Socialist ideology.

The Welsh NHS has of course complained and the Mail’s response to those complaints is here.

We here at the ASI might not have put all of this into quite such politically loaded terms but the basic critique is correct, in that NHS Wales performs less well than NHS England. And we also know why this is so: NHS Wales has not adopted the last few rounds of a more market based structure as NHS England has. We’ve also known this for some years:

Some would argue that the drops in waiting times were driven by increased spending, rather than targets, patient choice and hospital competition. Hence the fears sparked by the McKinsey report of the possibility of massive cuts in services. However, money alone cannot explain why waiting times have dropped and equity has improved in England. During the same period that we examined waiting times in England in our study, Scotland and Wales, which both explicitly rejected market-driven reforms, have spent more per patient but have seen much smaller decreases in waiting times.

The more market orientated NHS England is both more equitable and more efficient than the less market orientated NHS Wales and NHS Scotland. Indicating that market based reforms are a pretty good idea: whatever that socialist ideology (although to be fair about it, it’s really just an innate conservatism allied with the traditional British dislike of anything that smacks of trade rather than a principled socialism) might have to say about it.

The tax system is the biggest barrier to growth

Outside of academic papers that too rarely see the light of day, most “research” is unremarkable in its optimism about the state of entrepreneurship in the UK. That’s why the RSA’s Growing Pains: How the UK became a nation of “micropreneurs” caught my eye. It paints a stark picture.

The UK, according to the report, has become a nation of micro businesses, while the proportion of high-growth businesses has plummeted: “UK businesses are becoming increasingly micro in size – reducing the overall potential for economic output and future growth, and increasing the economy’s reliance on a relatively small number of larger businesses.”

Since 2000, the proportion of businesses classified as micro (0-9 employees), as a share of all UK businesses has grown from 94.3 per cent of all private sector companies to 95.4%. This represents an additional 1.4 million micro firms and an increase over the same period of 43%.

“At the same time, the proportion of high-growth enterprises has declined sharply, falling by more than a fifth in the majority of regions since 2005.”

Although the number of high-growth firms is expected to rise over the coming years, the report cautions optimism: “performance is expected to remain below 2005 levels in all regions except London”.

So how can we solve the problem? According the entrepreneurs, the tax system (44%) is the biggest barrier to growth – ahead of a lack of bank lending (38%) and the cost of running a business (36%).

Another problem highlighted by the report is that entrepreneurs don’t know what the government is up to:

“Around three-quarters (73%) of small business leaders also say the Government must make it easier for SMEs to access the right information and support for growth. While several of the Government’s recent incentives to support SMEs are designed to address the top-cited barriers, perhaps this information is not reaching the people who need it the most.”

Two polices are put forward in the conclusion to help entrepreneurs. First, “continued reform of the apprenticeship scheme could help micro firms to grow out of this business size category”. Second, “more tax relief like the National Insurance holiday could also pay real dividends.” It would be worth exploring the former in detail (something I plan to work on), but I don’t think another NI holiday goes nearly far enough: Employers’ National Insurance should be scrapped entirely. And no just for small businesses.

Being an entrepreneur is tough. As the report points out, “the majority (55%) of new businesses don’t survive beyond five years.” Scrapping Employers’ NI is the logical place to start.

Philip Salter is director of The Entrepreneurs Network.

‘Global Inequality as a Consequence of Human Diversity’

Over the past few days I read Tatu Vanhanen‘s new book, Global Inequality as a Consequence of Human Diversity published by the Ulster Institute for Social Research. Though I am broadly open to the arguments he makes therein, it is not a good book and I cannot recommend it. I have not read IQ and the Wealth of Nations the 2002 book he published with Richard Lynn, but I suspect the theses are very similar.

His argument runs that the existing explanations for the variation in living conditions between nations are either hard to falsify (like Jared Diamond’s and Jeffrey Sachs’), excessively narrative, explain too little of the variation, or beg the question (like Daron Acemoglu & James Robinson’s).

He advances an alternative explanation: since (a) human evolution has been recent and extensive enough to produce substantial morphological differences (consider how different Koreans, Somalians and Papua New Guineans look); and (b) we have a large literature suggesting that lots of traits, especially cognitive ability (measured well, he believes, by IQ) are substantially genetic, we shouldn’t assume all human populations are genetically similar in intelligence. Since we know that intelligence is important for social success within populations we should not be surprised if it controls success across populations.

Quoting Pilar Ossorio, he says:

According to contemporary geneticists, any two unrelated humans are about 99.8% or 99.9% genetically identical, but because ‘the human genome contains approximately 3bn nucleotides (DNA building blocks), a 0.1% or 0.2% difference translates into millions of sites at which two people will have a different nucleotide.’

He constructs an ‘Index of Global Inequality’ (IGI) out of six measures of societal success: gross national income at purchasing power parity; the share of the population in tertiary education; under-five mortality; life expectancy; sanitation facilities; and an index of democracy. He finds, with a simple regression, that around three quarters of a country’s IGI is explained by its average IQ. Further, most of the outliers have special explanations for why they depart from the curve, the biggest four being: oil, caribbean tourism, history of socialism and civil wars.

In and of itself, this argument is somewhat interesting and somewhat suggestive. What is surprising is that this is almost the entirety of the book, fairly laboriously spread over 170-odd pages. It makes almost no attempt to deal with the evidence against it. For example, it’s true that within Western groups IQ is highly heritable (i.e. most of the variation between individual is due to genetic factors) and largely unaffected by environment. It’s also true that within poorer societies a large fraction of IQ is down to genes, but this fraction is lower, because there are many more of the big downside factors that can really stunt cognitive development (principally malnutrition). And it’s much less clear that the difference in IQ across the world, where environments are extremely heterogeneous, are down to genetics.

It’s not that it’s impossible they are and there is rock solid evidence for the alternative. But Vanhanen doesn’t even attempt to provide evidence for his view that IQ is practically entirely genetic, even across strikingly different environments. One flaw of the book is that once he has stated that the evidence suggests IQ is mainly genetic within populations, he begins assuming the link between IQ and development across populations purely represents human diversity-caused differences, with only the unexplained residual environmental. This is not representative of the stronger stuff I’ve read in the area.

This leads into another puzzling issue with the book: the fact it fails to deal with any of this existing literature. There are better ways to test whether institutions, geography or human diversity is driving differences in development and he doesn’t really attempt any of them! For example, a 2011 paper found that effectively random variation in institutions had no effect on the economic outcomes of a given African ethnic group. The literature is large and the debate is still raging, and Vanhanen’s ‘side’ might end up being judged right, but his approach adds basically nothing to the question of whether IQ causes development or development causes IQ.

I suppose I can’t really blame the book for its cheapness, the relatively frequent typos, the ugly and unclear charts and tables, but these certainly reinforce the overall feeling of lightweight pointlessness you get when you read it. And I can’t stress enough the importance of human capital theorists being epistemically cautious in their claims, given how controversial their conclusions are. People, working on sound principles, often devalue a perspective when they hear a weak argument in its favour (‘if that’s the best they’ve got…’), and I think Vanhanen’s new book will only weaken the case for considering human diversity when looking at global inequality.

The ECB is fiddling while Europe burns

If not quite burning yet, the eurozone is kindling. For once, most people agree why: money is very tight.

The central bank’s interest rate is low, yes, but this is not a good measure of the stance of monetary policy. What matters is the interest rate relative to the ‘natural’ interest rate – ie, what it would be in a free market. It’s difficult to know what this natural rate is (as Hayek would tell us) but we can look at things like nominal GDP and inflation to help us guess. Both are way, way below levels that the market is used to. Deflation is back on the menu.

As Scott points out, whatever you think about the American or British economies since 2008, the Eurozone looks like a case study in central bank failure:

The eurozone was already in recession in July 2008, and eurozone interest rates were relative high, and then the ECB raised them further.  How is tight money not the cause of the subsequent NGDP collapse?  Is there any mainstream AS/AD or IS/LM model that would exonerate the ECB?  I get that people are skeptical of my argument when the US was at the zero bound.  But the ECB wasn’t even close to the zero bound in 2008.  I get that people don’t like NGDP growth as an indicator of monetary policy, and want “concrete steppes.”  Well the ECB raised rates in 2008.  The ECB is standing over the body with a revolver in its hand.  The body has a bullet wound.  The revolver is still smoking.  And still most economists don’t believe it.  ”My goodness, a central bank would never cause a recession, that only happened in the bad old days, the 1930s.”

. . . And then three years later they do it again.  Rates were already above the zero bound in early 2011, and then the ECB raised them again.  Twice.  The ECB is now a serial killer.  They had marched down the hall to another office, and shot another worker.  Again they are again caught with a gun in their hand.  Still smoking.

Meanwhile the economics profession is like Inspector Clouseau, looking for ways a sovereign debt crisis could have cause the second dip, even though the US did much more austerity after 2011 than the eurozone.  Real GDP in the eurozone is now lower than in 2007, and we are to believe this is due to a housing bubble in the US, and turmoil in the Ukraine?  If the situation in Europe were not so tragic this would be comical.

There is a point here. Economic news, by its nature, tends to emphasise interesting, tangible, ‘real’ events over things like central bank policy changes (let alone the absence of changes).

Of course that can be deeply misleading. The stance of money affects the whole economy (at least the whole economy that does business in nominal terms, which is pretty much everything except for gilt markets), and the Eurozone is experiencing exactly the sort of problems that the likes of Milton Friedman predicted that tight money would create.

Overall, the Euro looks like the most harmful institution in the world, except perhaps for ISIS or the North Korean govt. It may be unsaveable in the sense that it will never really be an optimal currency area, but looser policy (which free banking would provide) would probably alleviate many of the Eurozone’s biggest problems. Instead, what Europe has is the NHS of money – big, clunking and unresponsive to demand.

And the ECB seems wilfully misguided about what it needs to do. The only argument against this is that surely—surely—Draghi and co know what they’re doing. Well, what if they don’t?

Another exercise in rewriting economic history

It is just so fun watching people rearranging the historical deckchairs to make sure that their tribe looks good and that the tribe of their opponents can be portrayed as those nasty, ‘orrible, people over there. And so it is with this latest from Ha Joon Chang:

First, let’s look at the origins of the deficit. Contrary to the Conservative portrayal of it as a spendthrift party, Labour kept the budget in balance averaged over its first six years in office between 1997 and 2002. Between 2003 and 2007 the deficit rose, but at 3.2% of GDP a year it was manageable.

Quite: in those first few years Blair and Brown held to the spending limits that had been suggested by the previous, outgoing, Tory government. On the basis that if anyone thought they were the spendthrift Labour party of old then they wouldn’t get elected. So there was, in there, a period of a public sector surplus. It’s only after the second election that they ripped up that idea of fiscal restraint and became that Labour party of old again. So “balance” over the six years is actually a couple of years of Tory policy then spend, spend, spend.

And a deficit of 3.2% a year might be manageable: except of course it wasn’t, was it? But more importantly it is a grave violation of the precepts of Keynesian economics to be having a deficit of any sort at that point in the economic cycle. If we are to take Keynesian demand management seriously (we don’t, but let us do so arguendo) then yes, there should be fiscal expansion in the slumps. But the counterpart to that is that in the boom there should be restraint: a surplus, not a deficit. This is not to pay off the previous debt, it’s not to create the borrowing room to provide the firepower for that next slump. It’s because demand management means that you temper the booms as well as the busts. Given that the middle part of the Brown/Blair Terror was in fact the tail end of the longest modern peacetime boom then the public accounts should have been healthily in surplus. In order to temper that boom.

Chang is doing an edit to history here, to show that his tribe is better than the other one. Given the circumstances of the time Labour really were sailor-type drunken loons going on a spree with the nation’s chequebook and don’t let anybody tell you different.