Two cheers for Mark Carney

Applauding regulators, and especially the financial variety, is rare but maybe the tide is finally changing.  It was a delight to see Ofgem attacked this month by its previous chiefs for reducing competition and thereby contributing to higher prices, i.e. the opposite of what utility regulators are supposed to do.

Likewise it was a delight to read in The Times (“Regulators join bandwagon heading away from Bank”, 18th August) that the Prudential Regulation Authority (PRA) has lost 160 staff.  That is only 10% of the total and the cynical may believe that they were always lost.  Even so, it is a step in the right direction and the Governor’s “One Bank” plan deserves some of the credit.

The Bank’s present 3,600 staff compares with 2,900 in February 1997, i.e. before Gordon Brown removed banking regulatory and supervisory responsibility.  This compares like with like. In 1974, Bank of England staff numbered 5,500 excluding print workers.  The long term staffing levels are declining but, with the transfer of regulation to Brussels, Mark Carney should still be looking to halve the current number to about 1,800.  For comparison, the Bank of Canada has, according to its latest (2012) Annual Report, 1,239 staff.

The odd thing about The Times report is its sepulchral gloom.  We should be rejoicing that personnel are leaving the PRA and that they are joining trading banks to direct their compliance.  Surely less interference from bureaucrats and more self discipline by banks is just what we want?

Why only two cheers for the Governor?  Things seem to be going in the right direction at last but they have a long way to go.

Spotting the effect of the minimum wage

 

The first place we’d expect to see the effects on unemployment of a minimum wage that was too high is of course in the unemployment rate among teenagers and the young. For these are the people with little to no training, no job skills, and thus those that a minimum wage is going to be binding on. So, what do we see in the UK?

Centre-left think tank the Institute for Public Policy Research (IPPR) says that a full-blown economic recovery will not resolve the UK’s youth unemployment problem.

Its latest report says despite steady falls in unemployment, there are still 868,000 out-of-work 16 to 24-year-olds.

Later on Wednesday, the latest official UK unemployment figures will be revealed.

They have been falling steadily for the last year.
Gap

The IPPR highlights a striking mismatch between what young people are training for and the types of jobs available.

For example, it says, 94,000 people were trained in beauty and hair for just 18,000 jobs, while only 123,000 were trained in the construction and engineering sectors for an advertised 275,000 jobs.

The IPPR says youth unemployment is lower in countries where the vocational route into employment through formal education and training is as clear as the academic route.

It says this helps, as it puts the two on a higher perceived footing.

We’re certainly willing to believe that more vocational training would be a good idea. We could have institutions of higher learning that specifically existed to teach people how to do real world jobs rather than providing a more theoretical education as at a university. Perhaps we could call them Polytechnics of Technical Schools?

But that the IPPR insists that even a full economic recovery will lead to there still being a large amount of teenage unemployment means that we really do have a minimum wage that is too high. Yes, even that special, lower, minimum wage for the young is too high: all we need as proof perfect of this contention is that statement that there will still be heavy youth unemployment even at the top of the economic cycle.

Switching mobile networks is easier than switching governments

Unlike lots of people on the right, I like Owen Jones. He’s good natured and often challenges orthodoxy on his own side, and he’s a thought-provoking writer. 

Having said that, I usually disagree with what he writes on economics. His Guardian piece this week, which called for the nationalisation of the UK’s mobile network operators, was a good example. It’s tempting to dismiss it as clickbait, but it represents a train of thought that is increasing in popularity. And if nothing else it may shift the Overton Window.

Jones starts by pointing out that nationalisation of big industries is very popular among the public at large. “While our political overlords are besotted with Milton Friedman, the public seem to be lodged somewhere between John Maynard Keynes and Karl Marx.” 

A fair point. He might also have noted that the public disagrees with him about lots of other things: the obvious example is hanging, where the public is somewhere between Roger Helmer and Oswald Mosley, but there’s also immigration, which 55% of people want reduced ‘a lot’ (and another 21% want reduced ‘a little’). The Great British public thinks the benefits system is too generous by a 2-to-1 margin, and think that ‘politicians need to do more to reduce the amount of money paid out in benefits’ by a 3-to-1 margin. And so on. On these issues, and presumably many others, I assume Jones thinks the public needs further persuasion.

It isn’t necessarily that the public really is bloodthirsty or xenophobic or anti-poor or quasi-Marxist; it’s that the public is extremely uninformed about most things. How could you judge whether we needed more or less immigration if you thought we had more than twice as much immigration as we actually do? How could you judge whether the railroads should be nationalised or not if you did not know that passenger numbers had doubled since privatization, after decades of decline under the state?

Jones claims that mobile phone networks are an inefficient natural monopoly, without any real reasons given. This claim is untrue. The UK has four competing mobile networks (Vodafone, O2, Three and EE, which was formed by a merger by T-Mobile and Orange) and dozens of aftermarket “mobile virtual network operators” that lease wireless spectrum from those four networks (GiffGaff and Tesco Mobile are two popular examples). None of these networks are unusually profitable and all spend enormous amounts on marketing. Try spending a day in a city without seeing at least one advert for each company. This is not the behaviour of monopolistic industry!

(There are a couple of other frustrating errors in the piece. For instance, a typical £32-a-month 24-month contract can get you an iPhone worth £550, not a device worth £200 as Jones claims.)

Yes, signal blackspots are annoying. (Take it from someone who spent his teenage life having to walk into the garden to send a text message.) And mobile networks’ customer service really does suck sometimes! But Jones is comparing reality with an ideal where resources are infinite. Since resources are not infinite, we have to have some way of deciding what imperfections are tolerable. 

For example, as annoying as blackspots are, the optimal amount of coverage is obviously less than 100%. The phone networks reckon they cover around 99% of the population, and as frustrating as it is when you’re in that last 1%, the marginal costs rise dramatically when you try to cover that last 1%. We could cover them at great cost, meaning that we have less money to spend on other important things elsewhere. The question is one of priorities.

Ultimately, the important question that Jones does not answer (or ask) is, compared to what? Private sector firms might be irritating sometimes. Unless you can show that nationalised firms would be less irritating and better overall, that doesn’t tell us anything about what we should do. 

There are lots of examples of nationalised firms that were absolutely terrible. Tim remembers waiting three months for a landline when the GPO ran the phones; and then there is the huge drop-off in rail passenger numbers under British Rail, followed by an equally huge recovery after privatisation:

GBR_rail_passenegers_by_year

The fact that the state funded some of the scientific research that led to the iPhone doesn’t mean that we’d have better phones if we nationalised Apple. (It might be a case for state funding for scientific research that is released into the public domain, though.) As Tim says, “The State can be just as good as the market at invention, the creation of really cool new technologies. But it’s terrible compared to the market at innovation, the getting of that new technology into peoples’ hands so that they can do cool and interesting new things with it.” 

Economies of scale exist, as Jones suggests, but so do diseconomies of scale. Firms can be too big. And when you have a single network (whether it’s privately or publicly owned), customers lose all ability to ‘exit’ a firm that is giving them a bad service, so the only recourse they have is at the ballot box. 

Which brings us back to the first problem with Jones’s piece: politics is a complicated business about which we know little. If we don’t like what we’ve got, we have to hope that a majority of other voters agrees with us – and even if we’re right, they may not be informed enough to agree with us. 

It’s a lot easier to switch mobile phone providers than it is to switch governments. Ultimately, it’s that pluralism and freedom of exit that drives improvements in markets, and tends to make governments relatively bad at doing things. For all the mobile network industry’s problems, the question is: compared to what?

Ahhrgh! Terror! The robots are coming to take our jobs!

We’ve another one of those little horror stories that the robots are coming to take all our jobs. This is a follow up, concerning Europe, on a US report that decided that near half of all jobs could simply disappear to the robots (who are coming to take all our jobs, recall) in the next couple of decades. Sadly, both reports fail to note one obvious and simple fact:

Having obtained these risks of computerisation per ISCO job, we combine these with European employment data broken up according to ISCO-defined sectors. This was done using the ILO data which is based on the 2012 EU Labour Force Survey. From this, we generate an overall index of computerisation risk equivalent to the proportion of total employment likely to be challenged significantly by technological advances in the next decade or two across the entirety of EU-28.

The answer being, no not 42, more than 50% of all jobs are threatened by technological obsolescence in the EU over that next couple of decades.

Is this something we should be worried about? Clearly the authors of the paper think it worth bringing to our attention, but is it actually worth worrying about?

Well, no. Because even the most slerotic of European economies is going to destroy and create more jobs than that over that same time period.

Using the UK as a rough example, there are around 30 million jobs in the economy. 3 million of these are destroyed each year: around 10%. The economy also creates around 3 million jobs a year. Roughly you understand: and a recession isn’t, in general, when more jobs get destroyed, a recession is when fewer jobs get created, that’s what makes the unemployment rolls go up.

So the claim is that 50% of jobs in the EU might get destroyed by robot competition in the next two decades. And yet we would expect, just as a straight line estimate, that the EU economy will destroy and create four times as many jobs as that over that same time period, 200% of the current static workforce.

Even if this is something that we want to worry about it’s a worry at the margin, it’s a little bit more of a known and understood process that we can in general observe that we can deal with, rather than some horrific step change in our lives that we’ll have trouble adapting to.

There is one more point here. If you do want to worry about this it’s important to note that it’s not large companies that create jobs, it’s new and small ones. So, if you want to make sure that the robotic unemploymentaggeddon doesn’t in fact carve a swathe through Europe you’ll need to reduce the regulatory and legal burdens that new companies face in establishing themselves. Deregulation, ease of entry into the market, these are the solutions even if you do want to panic.

My word, you mean competition actually works?

Well, would you look at that! Apparently competition works to the benefit of consumers! Who could have possibly predicted that outcome?

Shop prices fell at the steepest rate for at least eight years last month as the popularity of discount stores among the middle classes helped to drive down the cost of clothing and consumer goods.

The overall price of items at the till fell by 1.8 per cent compared with June last year, with the price of clothes down by 13.7 per cent year-on-year.

The figures, compiled by the British Retail Consortium/Nielsen shop price index, show the fastest drop in prices since the trade association began compiling data in 2006.

It was also the 14th month in a row in which shop prices fell, easing the pressure on households where wage-earners have suffered pay freezes.

Yes, of course, the capitalists are straining every sinew to increase the profits that they make from our need for basic necessities such as food and drink. But in doing so they find themselves competing with other capitalists who would also like to like that pelf from our pockets. That competition then limiting the amount any one shop can charge and finally leading to falling prices for consumers.

Of course, a number of people have pointed this out before, starting with Adam Smith, Bastiat had things to say on the point and even Karl Marx got it. Monopoly capitalism is to be avoided for it is without that competition, for it is that market choice that makes such a system work to the benefit of consumers.

This is all obvious to us, the initiates, of course. But we need to continue to make a song and dance about it. Yes, there really are things that governments must do that cannot be done by other actors. Yes, there really are times that said government must intervene in the economy. But for the most part that intervention necessary is simply to ensure that competition is possible.

It’s not necessary to ensure that competition is happening, only that it can. For a monopolist in possession of a contestable monopoly is unable to exploit that monopoly for fear of competition arising to contest it. It’s not even necessary to have a level or even playing field, only to have an open one.

Worth noting the next time someone starts to complain about the monopoly of the supermarkets (as they do every few years, prompting yet another enquiry). Precisely because competition is forcing prices down we’ve obviously not got an exploitable monopoly here.