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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

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.


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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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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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Apparently Nigeria now has a larger economy than South Africa

Written by Tim Worstall | Tuesday 08 April 2014

The government of Nigeria has had a quick look down hte back of the couch and appears to have found and extra three quarters of the economy just lying there. Well over $200 billion's worth in fact:

Nigeria’s economy surpassed South Africa’s as the largest on the continent after the West African nation overhauled its gross domestic product data for the first time in two decades. On paper, the size of the economy expanded by more than three-quarters to an estimated 80 trillion naira ($488 billion) for 2013, Yemi Kale, head of the National Bureau of Statistics, said at a news conference yesterday to release the data in the capital, Abuja. That compares with the World Bank’s 2012 GDP figures of $262.6 billion for Nigeria and $384.3 billion for South Africa.

That's how shall we put this, a fair old difference, isn't it?

Much of the chuntering on about this is over how it makes the debt and taxation loads look much smaller, they being numbers that haven't changed. But the much more important one is to grasp the point this makes about economic planning.

We do actually know that this sort of mismeasurement is commonplace right across economies. It's not just the way that it's very difficult to measure the size of black (ie, innately illegal) economies, or grey (legal, but hiding from taxation), it's that we're only ever doing statistical sampling of an economy when we try to measure how large it is. And over time our statistical methods, if we don't change them, are going to get further and further out of whack as the structure of the economy changes. To take an absurd illustration, we we tried to measure transport in the UK using the methods of 1880 we'd note more rail and very fewer horse drawn journies but entirely miss the rise of the motor car.

So, given these problems a rebasing every now and again isn't that bad an idea. We in hte UK end up chaging some part of our statistical methods with just about every release of the statistic (hyperbole alert!) and other places devoting less attention to the problem might, as here, do it only once in decades. All of which is just fine but let us now add this to another current preoccupation.

We've managed to hunt down and shame into silence most of those who argue that planning an economy is either desirable or even possible when we're operating at the technological frontier. But there's plenty about who insist that poor countries must plan, must have the joys of the central plan as we did not so that they can become rich by the method that we did not. Even on the face of it that looks like a pretty silly argument they're using but add to it the news from today.

Nigeria's just found that extra $200 billion down hte back of the couch. How in heck can you plan and economy when your estimate of what's actually in that economy is out by 40% or so?

Quite: exactly the places that leftoids tell us must be using planning are exactly the places where the Socialist Calculation problems hits hardest. No one's got a clue what is currently actually happening: so how in heck can anyone plan what should be done next?

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Should the government play the stock market? Or the gold market?

Written by Ben Southwood | Thursday 03 April 2014

A recent report from the National Audit Office found that the government could have made £750m more from the sale of Royal Mail if it had sold at the highest price the shares reached on its first day. This has led many to blame the government for selling off the family silver at the bottom of the market. Others have pointed out that the reason for privatising Royal Mail was to subject it to the disciplines of the market, not to raise money. And that no one knows in advance what a share will be worth. Grey markets undervalued the share as well—and of course some advisers said it would rise higher, just as others said it wouldn't. Perhaps government politicking prior to the sale caused some of the problems. In any case, the value has not disappeared, it has just been distributed differently. There may be weak reasons to question the profile of the distribution (e.g. will it be spent more progressively or efficiently by government?) but realistically we're talking a small amount of the budget and bear in mind that investors who ordered more than £10,000 of shares were shut out completely.

But one interesting angle is whether this is like Gordon Brown's gold "sell-off" of 1999-2002. As everyone remembers, Brown, as chancellor of the exchequer, sold off the government's gold at what turned out to be the bottom of the market, losing out on potential gains easily ten times more than available with Royal Mail. He is widely criticised for this, but I can't quite see why. I can't think of any good reason why the government should hold any assets whatsoever. On top of this, there are at least four reasons why the state should not hold any specific assets:

1. The government is not well placed to play asset markets. So there's an interesting question as to whether the government should hold net wealth. Maybe there are shocks where easy sources of income will evaporate and the government will need to instantly liquidate some assets in order to pay its normal bills, defend the country against external aggressors, enforce the law etc. This might suggest the government needs to hold net wealth. But we know that even very smart and knowledgeable fund managers with all the right incentives only consistently outperform the market due to luck. So what would make us think, outside of one issue I'll deal with later, that the government's agents, so universally derided for competence in most contexts, could succeed in this either impossible or just really really really hard task? The UK government's Royal Mail and gold holdings were vastly out of proportion to those assets' size in relation to all wealth. If the government wants to hold wealth we know that it should hold a low cost exchange-tracker, as broad-based as possible. Otherwise it will effectively be handing over taxpayer wealth to traders in the markets.

2. Playing asset markets may directly distort those markets. If governments hold given assets (e.g. Royal Mail shares or gold) then it might be because there are social welfare reasons for doing so. It's at least possible that people have the specific desire for the equity of companies to not be held privately or to be held by the state and this something worth at least factoring in. When it comes to gold then individuals might be glad the government has it as a backstop. And of course the state could just be holding these assets on behalf of its citizens, perhaps because there are economies of scale in so doing. Even if there aren't benefits to the state holding assets on behalf of citizens, individuals may take these holdings into account as if they were their own, thus causing only small inefficiencies. But I take most of these considerations to be of minuscule empirical importance. Mainly the government's holdings of assets cannot be justified by these reasons. But since the market will be influenced by their holdings, they will reduce the supply of certain sorts of assets for the market to hold, leading to price shifts and portfolio rebalancing. Since this will be away from the ideal portfolio firms would have held (I can imagine exceptions but none of them are relevant here) this reduces social welfare.

3. Government holding assets means they're unlikely to be used with allocative efficiency. This depends on some of the considerations in 2, but again they're very very unlikely to have empirically large impacts. By contrast, there are probably some very empirically large impacts from the fact that few of the government's assets—totting up to about £600bn, according to a recent ASI report—are ever marketed. As we know from Friedrich A. Hayek's most important work, market pricing is how we rationally allocate resources in society. This was why Hayek and Ludwig von Mises won the socialist calculation debate as even noted Marxist G.A. Cohen agreed. What this means for assets is that we don't know whether they are properly used unless we trade for them. An illustration: if the government sold off all its army barracks the army might then rent the selfsame barracks from their private owners. But it's possible that they would rent somewhere else, and someone might set up a factory or a farm or a theme park on the original site. Without the market competition process we have no idea what would happen and we have no idea what the best use of the land and buildings would be. This applies to big nebulous assets like Royal Mail just as it applies to land and as it applies to gold.

4. If the government holds assets it may have incentives that distort its policy-making decisions. Why does the UK have such an appallingly tight planning regime even though basically all economists think it's extremely inefficient and damaging? It's probably because lots of people own houses and these groups tend to be disproportionately likely to vote and are otherwise politically well-connected. If these groups rented their house and owned the same amount of wealth spread across a wide range of assets it's very unlikely we'd see such economically unjustifiable policies. The same goes, potentially, for government-held assets. After all, the government will be blamed not to mention having less ability to achieve its policy goals if assets it holds lose value. It's not so much that they're likely to directly pursue policies designed to boost the value of state assets. But acts of commission are treated differently to those of omission. It seems highly likely that the government will treat policy changes that affect these particular assets' value differently, just like housing.

So maybe the government should hold some wealth, I can see the arguments for and I can imagine some arguments against. But if it holds wealth it ought hold assets as broadly as possible: because it's not placed to take gambles on particular assets; because doing so may distort markets directly; because holding assets takes them off the market and reduces allocative efficiency; and because holding particular assets may distort the incentives facing policymakers. Thus we should praise Gordon Brown for selling off gold just as we should praise Vince Cable and George Osborne for selling off the Royal Mail.

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What on earth is Germany doing here?

Written by Tim Worstall | Thursday 03 April 2014

This looks to me like an extraordinarily silly decision over there in Germany:

BERLIN—Germany's cabinet Wednesday adopted a bill to introduce a statutory pay floor of €8.50 ($11.72) an hour, a change in policy after Europe's largest economy for decades let business groups and trade unions set pay and working times in collective agreements. The measure, which targets the five million German workers who currently earn less than €8.50 an hour, will be introduced in 2015 with a two-year transition period given to existing regional and sector-wide wage deals.

Where do we expect to see the unemployment effects of a minimum wage? Quite, in the unemployment rate of the young, untrained and unskilled. So, what can we note about the youth unemployment rate in Germany, given that up until now it hasn't had a minimum wage that bites? Yes, quite, we can see that it's very low compared to that of other European countries.

What do we expect to happen with the introduction of a minimum wage, especially one this high? That the youth unemployment rate will start to look more like that of other European countries of course.

Oh, and Germany also has another problem:

Government officials have said that former East Germany with its lower wage and higher unemployment levels will likely be hit hardest by the new minimum wage.

Yup. Just doesn't look like a sensible decision to me.

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Video: the state of the minimum wage debate

Written by Sam Bowman | Tuesday 01 April 2014

Last month I spoke on the minimum wage at LibertarianHome's meet-up, and they have uploaded the video of the talk, as well as a very good summary write-up of my comments. I had a great time at the talk and I'm looking forward to attending more of their meet-ups in future. 

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