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"Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice" - Adam Smith

As I've been telling you for a couple of years now

Written by Tim Worstall | Friday 18 April 2014

A new ONS report makes for us a point that I've been regularly presenting to you over the past couple of years. Yes, there most certainly is variation in age at death across the country. And yes, those in more deprived areas do indeed tend to die younger than those in more affluent ones. But this isn't, and isn't from somewhere between not very much and a lot, because living in a deprived area kills you. Rather, it's because people migrate in and out of deprived and affluent areas and those doing the migrating tend to have different health prospects:

One factor that has received less attention is the selective migration of healthy individuals from poorer health areas into better health areas or vice-versa. This type of migration has been shown to play a significant role in increasing or decreasing location-specific illness and mortality rates, which then consequently impact on life expectancy figures. Norman, Boyle and Rees (2005) demonstrated that the largest absolute flow within England and Wales between 1971 and 1991 was of relatively healthy people moving from more deprived into less deprived areas. The impact of this migration was to raise ill-health and mortality rates where these people originated from and lower them in the destination areas. The authors also noted that the benefit to less deprived areas was reinforced by a significant group of people in poor health who moved from less to more deprived locations.

This also speaks to the error that is made about health inequality in the UK. Marmot, and thus the system itself, seems to think that it is economic inequality that determines health inequality. Thus, reduce the economic and you'll reduce the health inequality. But as above, we can see that at least sometimes the causation is the other way. People with bad health have bad economic outcomes: that's why they're moving to more deprived, also known as cheaper, areas.

This is that old difference between correlation and causation again. There is undoubtedly a correlation between income in an area and health and lifespan. It's been politically convenient for campaigners to insist that the causation is that the income differences cause the health and lifespan differences. And I've no doubt whatsoever that that is a part of it: but we've also got that reverse causation as well. That the initial health, and thus lifespan, inequalities are part of the cause of the economics ones. Which means, of course, that equalising the economic outcomes will not equalise the health or lifespan ones. And thus we can and should shout at those campaigners who insist that it will.

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A little reminder of how far we've come

Written by Tim Worstall | Thursday 17 April 2014

This is a little way off our usual beaten track here but there's an important point underneath it. An excellent piece in the NY Times about the impact of the deaths of the US Civil War upon that country. We look back now at the numbers, 750,000 or so killed, equate that to perhaps 7 million now in the much larger population, and think that these numbers must have terrorised the country, as that larger one would us today. But that's not quite how it was: people didn't brush off the casualties, but they didn't loom as large in the societal mind as we might think.  Partly because two thirds of those were due to disease and only one third to actual action. And while death from disease on campaign was at least partly caused by being on campaign death from disease while not on campaign was common enough so it wasn't looked at in quite the same way. But more than that:

If we work from an assumption that deaths from disease were not viewed at the time as war casualties, but rather as a continuation of prewar circumstances, instead of 750,000 casualties faced by Civil War-era Americans, we are left with 250,000. If we divide this figure by the four years of war, we have a crude estimate of 62,500 battlefield deaths per year. But even this figure requires context to understand its significance. It is important to keep in mind that death rates were tremendously variable in the period, even within relatively stable locales, because of the unpredictable nature of contagious disease. Some areas reported rates that varied from below 2 percent up to 6 percent. A conservative estimate of a 2 percent death rate for 1860 would have meant about 629,000 deaths that year for the nation as a whole, while a 3 percent rate would have resulted in 943,000 deaths (today’s rate is consistently below 0.8 percent). The additional battlefield deaths in the war would thus represent an increase of between 7 and 10 percent over the normal rates. Significant, but hardly catastrophic.

Yes, the deaths in that war (as in any) were horrendous, wasteful and we would most certainly hope to avoid any more in the future. But it's worth noting how far we've come since those days, our total death rate now is lower than just the variation in the total death rate at that time from year to year. This is basically the effect of sewage and vaccination (other medical treatments a little, but the real drivers are those first two). Two things that our now much richer society can afford as a matter of course.

Another way of putting this is rather hopeful. I tend to doubt that rich countries will ever be persuaded to get into an all out war ever again. Simply because there are so many fewer things that kill us now that we'll not, in terms of mass armies and mass battles, ever be prepared to take the risks.

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It's not capitalism that Cuba should be worrying about but markets

Written by Tim Worstall | Wednesday 16 April 2014

Cuba is, however gradually, reforming its economy which is great. However, they do seem to be concentrating on the wrong bits still:

Less well known and less common are the cooperatives but they are part of a political balancing act for the government, which needs to move hundreds of thousands of workers off the state payroll but also wants to slow the rise of capitalism. In many ways it prefers cooperatives, where each worker has a stake in the business, to private businesses where owners make profits based on the work of their employees.

That concentration on who owns what is the wrong thing to be concentrating upon. Sure, capitalism is useful, it's also a great bugbear of those over on the left. But it's also not the important point in an economy. What is important is markets: competitive markets at that, with entry and exit. This is vastly more important than whether those entrants (and those being forced to exit) are cooperatives, owned by the government or top hatted pot bellied capitalists like myself.

The reason for this is that there is no possible method of planning a modern national economy. We could use Alchian's (and Hayek's) point that only a market economy produces enough experimentation for us to be able to work out what to do, or that Socialist Calculation problem that means we've still got another century of Moore's Law to go before we could possibly calculate what to do. There is simply no alternative to using the prices and incentives that a market provides for us and so therefore that's where Cuba should be concentrating their efforts. Simply scrap the rules about who may do what, those licencing regimes. Worrying about who owns it is trivial by contrast.

As an aside, to those who will insist that Cuba provides wonderful free health care and so the system mustn't change. Amazingly, I think you'll note that this country, the UK, also manages to provide free health care to all citizens. And we manage to do this without being a communist dictatorship, without being in Stone Age poverty and without shooting anyone who wants to leave. So quite why those three things are considered necessary to provide tax paid for healthcare I'm really not quite sure.

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The importance of Tiebout effects

Written by Tim Worstall | Tuesday 15 April 2014

An excellent little piece of cheering news about what this coming century holds for us:

When I was done with In 100 Years, one prediction stuck in my mind more than any other. It was the mathematical economists Mas-Colell who, almost in passing, wrote, “I believe that Tiebout effects will be increasingly felt on a global scale.” He should know, having long been involved in government, in Brussels and his native Catalonia Spain. As the Wiki says, Charles Tiebout is the economist fundamentally associated with the concept of voting with one’s feet. His Tiebout model was designed to show how people choose their communities, within limits, simply by relocating and choosing to pay higher or lower taxes and prices (or immigrating, or simply fleeing, and choosing to bear greater risks). It’s the way suburbs emerge around cities – some with good schools and fancy houses, others with very low rents, and the rest at every stage in between. It covers refugee camps, too. That this ineluctable force of human nature will continue is the prediction I most confidently expect to pan out, in a century of global change.

For what this means is that free and liberal society will continue.

Think about what Tiebout really means: that people differ in their desires, differ in the trade offs they're willing to make. We all thus potter about looking for that set of circumstances that best suit us. It can be the trivial of making sure when young and dating that we live near the good booze and a decent supply of potentially willing sexual partners, moving out to calmer climes when we have chosen (or been chosen to) settle down, through to the ability of the self-appointed righteous to cluster together to congratulate themselves on their righteousness. Camden Council for example. This works on hte larger scale as well: we can and should be allowed to leave a political entity where those trade offs don't suit us. 

As opposed to those (Camden again) who say that we all have to live by the same rules, make the same trade offs. And that's the cheering part of the above prediction. That if Tiebout is going to hold for this century then that means that we'll continue to have a free and liberal society this century.

Maybe.

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Oh how we laughed all those years ago

Written by Tim Worstall | Monday 14 April 2014

Many years ago, just after Boris Yeltsin had abolished rationing and freed up food prices, I was in Russia when a little old granny was interviewed just before Easter. She wanted to know why egg prices were going up just before everyone wanted them to dye for the Easter festivities. Oh how we laughed about that, for of course the miracle of supply and demand means that when more people want something prices will rise. Not that we could expect someone subjected to 70 years of communism to quite get that.

This isn't something that's going to happen in our much more sophisticated age and place of course. Everyopne's far too well informed about how the world works these days:

Majority of parents back holiday price caps - new ITV poll More than half of parents say inflated holiday prices should be capped so they are not forced to take their children out of school for cheaper getaways, a new survey for ITV reveals.

Well, I guess that explains the Labour Party then if more than half of those old enough to breed are quite so clueless about the most basic concept in all economics, the price system.

So how do we go about remedial education for half the population?

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But firms don't try to maximise short term profits

Written by Tim Worstall | Sunday 13 April 2014

It's a standard enough trope, that modern capitalism fails because companies only ever try to maximise short term profits. Not enough is done to think of the long term. Yet there's a simple enough point that can be made about this. Any firm at all that invests in anything cannot be said to be maximising short term profits, as David Henderson points out:

He said matter-of-factly, as if there were no doubt, that profit-maximing companies maximize short-run profits at the expense of the long run. "If that were true," I replied, "then drug companies should end all R&D today. Their R&D expenses would fall and their profits would rise. And yet we don't see them doing that. They invest hundreds of millions of dollars in drugs that, in many cases, will not bring good earnings to them for a few years and maybe for 10 or more years."

Any investment in anything more long run than refilling the ink jet printers is evidence that a company is not trying to maximise short term profits.

Now, it's possible to think that perhaps companies should pay more attention to the very long term, this is true, but then we come to a rather different problem. Which is that companies are already the most long term looking organisations around. Governments, famously, never look beyond the next election day, we as individuals are known (indeed, it's often used as the proof needed that governments should nudge our behaviour) to suffer from hyperbolic discounting, paying insufficient attention to the far future. Which really rather leaves only companies as the organisations that do try to look out beyong 5 or 10 years. The major oil companies, for example, are famed for having 30 and 40 year horizons. And there's just no one else in our society that is looking that far ahead.

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Raising the minimum wage means lowering the workers' perks and conditions

Written by Tim Worstall | Saturday 12 April 2014

As Adam Smith himself pointed out all jobs pay the same really. When you take account of what's needed to do them, the terms, the conditions, the "disagreeableness" of them, add in the wages and they're all paying much the same amount. Which has an interesting implication for those who would raise the minimum wage:

There are many other forms of compensation, including fringe benefits, relaxed work demands, workplace ambiance, respect, schedule flexibility, job security, hours of work and so forth. Even a limited accounting indicates that these nonmonetary benefits amount to a substantial percentage of the total compensation employees receive, nearly 30 percent over and above wages of all workers and 20 percent over and above wages for restaurant workers, on the average.

Employers compete with one another to reduce their labor costs, and that competition is expressed in a variety of ways in labor markets — certainly in money wages, but also in terms of fringe benefits, work demands and all other forms of nonmoney compensation. Workers also compete for the available unskilled jobs. The competition among employers and workers will not disappear with a wage increase but will merely be redirected into the components of compensation packages not covered by the wage mandate. Wage floors, therefore, restrain competitive pressures in only one of the many ways in which businesses compete. With a minimum-wage increase, employers will move to cut labor costs in other areas. As such, employers are likely to reduce fringe benefits and/or increase work demands.

We can indeed raise that minimum wage and there will of course be job losses from doing so. It's even possible to insist that the benefits to those who have their wages raised outdo the disbenefit to those who lose their jobs although that's not something I'd be keen to try to prove to the newly unemployed. But we do also have to insist that raising the minimum wage is going to reduce those other terms and conditions under which people work. Might be as something as simple as insiting that the staff buy their own darn teabags, could be more stricness about breaks, or trady arrival, a bit more slavedriving to pressure mor work out of that newly more expensive labour.

But there will be that something that will compensate for those newly higher wages.

Another way of putting this is that a higher minimum wage might move wages but it's not going to change the total compensation on offer. And it's that insight that allows us to suggest something rather more interesting. As we know, employers' national insurance is some 13.8% of wages above the threshold these days. And yet it's clearly part of total compensation. So, what we could do is stop charging that tax upon incomes for those below, say, the full year full time minimum wage of £12,500 a year or so and we would expect that to feed through into wages. For we'd not, again, have changed total compnesation but we would have changed the non-wages part of it.

Another way of making the same point is to say that we don't have minimum wage poverty we have tax poverty. The government is simply taking too large a part of the wages of the working poor.

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The new economics foundation has been speaking to the newspapers again

Written by Tim Worstall | Friday 11 April 2014

Image from xkcd.

Those masters of economic logic, the new economics foundation, have been talking to the newspapers again. Gothenburg, a city in Sweden, has decided to experiment with shorter working days for the city employees. At which point nef says:

Anna Coote, Head of Social Policy at the New Economics Foundation, a UK-based think tank, welcomed the proposals. “Shorter working hours create a more committed and stable workforce,” Ms Coote told The Telegraph. “There are indications you can make savings by reducing working hours,” she added, citing an experiment in Utah where public sector workers were given a three-day weekend.

According to OECD data, there is a correlation between shorter working hours and greater productivity. The Greeks are the hardest working members of the OECD, putting in more than 2,000 hours a year compared with the Germans’ 1,400, but their workers are 70 per cent less productive than their Teutonic counterparts.

Yes, this is absolutely true, there is a correlation between higher productivity and shorter working hours. However, it is not that working shorter hours makes you more productive, although that could happen, sure. Your last hour of an 18 hour working day is unlikely to be as productive as your first of a one hour working day.

The causation is really working the other way around and for a well understood economic reason too. The average wages in any society will be determined by the average productivity of labour in that society. Thus a higher average productivity means a higher average wage. And we're well aware that most human beings are, most of the time, both greedy and lazy. Meaning that we'd all like to get as much of whatever with as little effort as we can manage. And that laziness also means that as we become increasingly rich we take more of that wealth as increased leisure, that being the point and purpose of going to work in the first place, to be able to afford the things that we want.

Thus more productive labour, in that richer society, works shorter hours. Not at all the other way around, working shorter hours makes you more productive.

There is actually a reason why Giles Wilkes named the nef "not economics frankly".

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I feel all dirty somehow, seeing who it is that I'm in bed with

Written by Tim Worstall | Thursday 10 April 2014

There are times when who supports an idea that you support means that you've got to reconsider your support for that idea. At the risk of Godwinning, that Adolf liked dogs is not a reason to either like or beat up dogs. But his support for anti-smoking is a reason to look askance at certain of the anti-smoking zealots. For his views on this were that smoking deprived the State of that valuable resource of men fit to fight and there's very definitely more than a whiff among today's zealots of people not being allowed to do things they wish to do because of the cost to the State of their doing so.

Which is what makes me cringe slightly over my support for the idea of a basic citizens' income. It's the sort of thing that The Guardian seems to be supporting:

The society our politicians are shaping is defined by the idea of "something for something". What would happen if, instead, we were given something for nothing? A new campaign for a "citizen's income" asks exactly that. Replacing the costly, complex benefits system, a citizen's income is an unconditional payment granted to every individual as a right of citizenship. It's not a high figure – barely enough to survive on alone, and below the minimum wage – but it is designed to prevent all of us from falling into poverty traps. Compellingly, it removes the stigma from state support. There is no difference between a student, a person managing life with a disability, a pensioner and someone struggling to find stable employment if we all share the same basic starting point.

Further supporters can be found here and here. That I support an idea supported by the Leader of the Green Party, by a professor from SAOS, by the usual list of concerned Europeans, yes, this does give me pause for thought. Given that all are usually staggeringly wrong about everything am I wrong to be supporting this idea?

And, having re-examined the idea I come to the conclusion that I'm not wrong in supporting it after all. For one very simple reason.

Their support is all about justice, equity, redefining the relationship between work and leisure and yadda yadda down the list of progressively desirable goals. My support is grounded in that good old idea of economic efficiency, you know, that thing that progressives never actually bother to consider.

My starting point is that whatever else happens in this world there is going to continue to be some version of the welfare state. People are going to continue to be taxed in order to provide handouts to that mixture of the incompetent, unlucky and lazy that make up the current list of recipients. There simply isn't going to be a Randian revolution where the entire idea gets chucked onto the ideological scrapheap. Given this I'd prefer to have a welfare state that was economically efficient. And the greatest inefficiency (quite apart from the incompetence with which the money is actually doled out) is the way in which benefit withdrawal rates and the taxes charged to the lowly paid lead to vast marginal tax rates on those lowly paid earning a little more money.

There are millions who face marginal rates of 60% and up, still hundreds of thousands looking at 80% and even some unfortunates with marginal rates over 100%. And yes, I do indeed believe in the Laffer Curve argument, it's just that I believe that it applies to all of us, not just the highly paid. Who in heck would bother to work another 10 hours a week if their disposable income would fall (something seriously possible in our current system)?

So, it's for this reason that I support the cbi. Simply because it would be staggeringly better than the current monstrosity of a welfare state that we have.

Which means that I'll just have to hold my nose and put up with those who also support the idea I suppose. I mean, seriously, me agreeing with a prof from SAOS? Did anyone think that a universe with such a distortion in it could continue to exist?

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CEOs make less than doctors you know

Written by Tim Worstall | Wednesday 09 April 2014

This is a rather amusing point being made by Mark Perry over the Pond. CEOs actually make, on average, rather less than doctors do. This is, as you will clearly note, not the usual story we get told about our times:

It should be noted that USAToday’s analysis includes the CEOs of only 200 of America’s largest multinational companies in the S&P500. According to the US Census, there are more than 27 million private firms in the US, so the 200 firms reported by USAToday represent only one of every 135,000 private firms in the US, or 0.00074% (less than 1/1000 of 1%). Note also that USAToday compares the annual wages of ALL full-time employees working at more than 27 million companies to the CEO pay of executives at only 200 companies.

We can get a more accurate and complete picture of CEO compensation by looking at wage data just released by the Bureau of Labor Statistics in its annual report on Occupational Employment and Wages for 2013. The BLS report provides “employment and wage estimates by area and by industry for wage and salary workers in 22 major occupational groups,” including the category “chief executives.” In 2013, the BLS reports that the average pay for America’s 248,760 chief executives was only $178,400. The 200 S&P500 firms reported by USAToday represent only one out of every 1,243 firms in the country that have a CEO at the head, and that small sample of 200 would represent only 0.08% of American CEOs, or less than one-tenth of one percent of all CEOs. The larger sample of CEOs reported by the BLS gives us a much better understanding of “average CEO compensation.”

That some CEOs make those very large multiples of the average wage is entirely true. But in the US economy it's a vanishingly small percentage of those who do that job. And it is worth noting that that average CEO pay is, in hte US context, about that of a dentist and rather lower than the average doctor.

It wouldn't surprise me at all if this were true here in the UK as well. GPs are, as we know, on a pretty good deal these days. £110,000 a year is commonplace, earned without really breaking into a sweat in that job. And it wouldn't surprise me, as I say, if the average CEO (or perhaps Managing Director we might say here) pay in the UK was below that.

Which leads to an interesting question. Do we actually collect the statistics that would allow us to prove this?

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