Compensation is compensation and wages are only a part of it

One of the oft used statistics these days is that US incomes have pretty much stood still over recent decades. Sometimes this is refined to median incomes: Joe Sixpack hasn't been doing any better and isn't that a telling indictment of the neoliberalismgrindingthefacesofthepoorintothedustofthepast30years.

The problem with the contention is that such claims always use household incomes and wages and salaries. Households have changed in size (got smaller) so incomes per capita have indeed risen. The other one is that using wages and salaries doesn't show compensation. Especially in the US where a major part of one's compensation for a job, but not of wages or salary, is health care insurance. Now some seem to think that this is free to the worker in some manner: that the employer pays it and it doesn't change wages. Not so:

Using our model, we characterize the compensating differential for employer-sponsored
health insurance (ESHI) -- the causal change in wages associated with gaining ESHI. We also characterize
the welfare impact of the labor market distortion induced by health reform. We show that the welfare
impact depends on a small number of “sufficient statistics" that can be recovered from labor market
outcomes. Relying on the reform implemented in Massachusetts in 2006, we estimate the empirical
analog of our model. We find that jobs with ESHI pay wages that are lower by an average of $6,058
annually, indicating that the compensating differential for ESHI is only slightly smaller in magnitude
than the average cost of ESHI to employers.

In short, even if not quite perfectly accurately, if you get $6k's worth of health care insurance from your employer then you don't get $6k's worth of wages from your employer. Which brings us back to those stagnant wages. Yes, health care insurance is usually an employer provided benefit in the US. Health care costs have been rising strongly in recent decades. From some 8 or 9 % of GDP to what is it now, 17%? Worker wages and salaries may have stayed constant but worker compensation hasn't: the extra that employers are paying is going on those rising health care insurance costs.

We've our own fools and propagandists over here who try to blind us with these sorts of numbers. One that comes to mind is the TUC's claim that since the labour share of income has fallen therefore the profit share must have risen. Either not realising or not letting on that the profit share hasn't changed much over the last 30 years either. It's the other two components of national income, mixed income and taxes minus subsidies, which have risen.

All of which leads to a conclusion. It's worth you learning some of these basic numbers and statistics about the economy. Not so that you can do anything about them you understand, just so that you'll recognise when you're being lied to.

About time we abolished national pay scales, isn't it?

I think it's about time we abolish those national pay scales for public sector employees. Just devolve wage negotiations down to the actual employer, the school, or the hospital. Of course, this would enrage the public sector unions as they gain much of their power from negotiating those national wages. But then that would be part of the fun, enraging those who should be enraged.

The reason we should do this is because national pay scales lead to low grade employees in high wage areas:

National pay bargaining for teachers should be scrapped because it leads to lower GCSE grades for pupils, particularly in middle-class areas, according to a study.

Schools in these areas find it harder to recruit good teachers since national pay scales prevent them competing with local private firms by offering higher salaries.

....
‘Our findings present strong evidence that the centralised wage setting of teachers’ pay has a negative impact on pupils’ learning.’

The logic isn't hard to understand. When local wages are high then all the bright people go and do something else than cram knowledge into the anklebiters' heads, for the national pay scale keeps teaching wages below local.

The same researcher, Do Carol Propper, has previously found that something very similar happens in the NHS:

In many sectors, pay is regulated to be equal across heterogeneous geographical labor markets. When the competitive outside wage is higher than the regulated wage, there are likely to be falls in quality. We exploit panel data from the population of English hospitals in which regulated pay for nurses is essentially flat across the country. Higher outside wages significantly worsen hospital quality as measured by hospital deaths for emergency heart attacks. A 10 percent increase in the outside wage is associated with a 7 percent increase in death rates. Furthermore, the regulation increases aggregate death rates in the public health care system.

So, about time we abolsihed national pay scales then I think. After all, the evidence is that they kill people and make the little darlin's even more stupid than the state school system normally leaves them. Neither is all that much of a recommendation now, is it?

No war on motorists? Tell that to the world outside Central London

“Left wing think tank wants higher taxes” is a bit of a “dog bites man” story, but the IPPR’s call of higher fuel duty was spiced up by some eye-catching facts about the costs of getting about. Contrary to popular perception, they found that the price of motoring has fallen slightly in real terms in the last ten years. Ipso facto, they conclude, the “war on motorists” is a myth. “Compared to users of public transport,” says the think tank’s associate director, Will Straw, “there is no war on motorists.”

This rather depends on how you define a war and who you think is the aggressor. A breakdown of the figures (see graph below) reveals that bus and train passengers have seen fares increase well above the rate of inflation since 1987, but the costs of taxing, insuring and fueling a car have gone up by even more. If average motoring costs have not risen in real terms, it is thanks to the impressive decline in the cost of buying a vehicle which has consistently beaten inflation and is now lower in both real terms and—quite remarkably—also lower in nominal terms (as of 2010). Globalisation, a genuinely competitive free market and a relative lack of state interference have reduced prices and brought some rare good cheer to drivers.

The same cannot be said of the other costs shown, all of which are dictated by the state (in the case of fuel duty and car tax), or by cartels (OPEC), or by the half-state/half-cartel hybrid of the public transport industry. Fuel and car taxes have gone through the roof by any standard, and while motorists could be forgiven for viewing cheaper cars as a small mercy to take their minds off the looting, the IPPR sees it as justification for taking a little more.

There is no doubt that the pockets of bus and rail passengers have also been systematically picked over the past 25 years, but as high as the prices of bus and train tickets are, they do not represent the true cost of public transport. Local public transport was subsidised by the taxpayer to the tune of almost £5 billion in 2010/11, and close to £8 billion was taken from the public purse to spend on the railways (IPPR, p. 14). No government has yet come to terms with the fundamental problem that public transport is inherently expensive and can only be sustained by forcing those who don’t use it to cough up while making their customers pay twice.

The IPPR helpfully points out that motorists can reduce their expenditure by driving less. As a piece of advice, this is rather like telling commuters to save money by not travelling at peak times; technically true so long as one ignores the essential nature of the journey. They appear to be of the belief that motoring is still the preserve of wealthy Mr Toads, pootling around for fun on a Sunday afternoon, whereas private cars are by some distance the nation’s primary mode of transport.

This metropolitan bias is in evidence when the report notes that 25 per cent of the population do not have access to a car. The IPPR describes this figure as “surprisingly low”. Out here in The Provinces, we might regard it as surprisingly high. A look at the numbers reveals just how marginal public transport is to much of the population outside central London. Nationally, the average household spends £21.60 a week on petrol, diesel and motor oils, but only £2.80 a week on rail and tube fares. The average household spends more on spare parts and accessories for their cars or vans (£1.80) than they do on bus and coach tickets (£1.50). To put it still more starkly, we spend more money on lease cars than we do on bus journeys. As should be obvious, this is not because bus and train fares are especially cheap, but because the average household is considerably less likely to buy them than they are to fill up their tank. (If all these figures seem low, it is because many people use only public OR private transport, and some may not use either very much.)

For the majority of the population who rely on their cars to get about, the miracle of consumer capitalism has alleviated the pain of escalating taxes by providing cheaper vehicles, but it strains credibility to suggest that they enjoy favoured status in government policy. Whether one looks at fuel tax, car tax, bus fares or train tickets, no one escapes from the squeeze. I would be tempted to say that war is being waged on us all were it not for the fact that the cost of motoring is kept artificially high while the cost of public transport is kept artificially low thanks to the way it is subsidised by everyone—motorist, cyclist and pedestrian—whether we like it or not.

The mirage of 'affordable housing'

The publication of the Montague Report into the barriers to institutional investment in private rented homes threw up some interesting headlines. Most of the debate over the report actually seemed to concentrate on a proposal to relax local government requirements on developers to build ‘affordable housing’, as this is imposing higher costs on them as they are forced to sell at below market rates. That local government are free to do so if they wish to suggests that there may actually be some interesting reasons why they have not been doing so, perhaps related to Public Choice dynamics at work – for instance, do local governments have a vested interest in reducing development?

The housing market is a hugely complex area – the Montague Report itself is only examining a particular aspect of how to expand availability in the private rented sector. In many respects it is actually quite a sound report which, apart from this recommendation also rejects such terrible ideas as rent controls and Government guarantee schemes. As the ASI’s Ayn Rand lecture by John Allison of the Cato Institute pointed out, the latter is the route the US has gone down and it has proven disastrous. Similarly, rent controls and stricter regulation of landlords leads to less choice of housing and more landlords operating outside of the law altogether.

Confusingly, however, is what is actually meant by the term ‘affordable housing’ in the UK. In an economic sense, affordable housing usually means a comparison of house or rental prices to median incomes in a particular area. There is no doubt that the UK faces a huge problem of affordability in this sense as this report shows. However, in UK Government-speak, affordable housing actually refers to ‘social rented, affordable rented and intermediate housing, provided to eligible households whose needs are not met by the market’. What is meant, therefore, by affordable housing is nothing to do with its affordability but instead the term simply refers to availability of socialised housing. There is no doubt that this confuses the debate: when we hear the term affordable housing, it has nothing to do with affordability of that housing.

For the record, the UK has a high proportion of socially-owned housing by international standards (20%). It must also be said, however, that even a description of affordable housing related to income is arbitrary and flawed because it carries a value judgment as to how much income any particular individual ought to spend on housing as opposed to other items of expenditure or saving, as well as an arbitrary assessment of quality of housing.

It quite clear that many government efforts to provide less expensive housing (to avoid confusion) are actually not merely failing to do so but are actually counter-productive. As the Montague Report itself shows, by forcing developers to build ‘affordable housing’, local governments are hampering supply and are thus making housing less affordable! Unfortunately, the Montague Report also argues for restrictive covenants on build-to-rent housing, noting that rental and owner-occupied housing are competing for the same land. This is treating the symptoms rather than the cause, which is shortage of land for development.

A free market definition of affordable housing must ultimately be the price that consumers are willing to pay for housing. Only consumers should ultimately decide where they want to live, in what kind of dwelling and by what financial arrangement – constrained by the supply of course. Putting it simply, if a million houses were rapidly built around London, it is pretty clear that house prices would fall generally and that this would increase affordability. Even if these were a million mansions, this would still increase the affordability of housing in general. Such building cannot occur, however, due to planning constraint. As the Hilber and Vermuelen report concludes ‘Regulatory constraints imposed by the British planning system can to a large extent explain the high house prices ‘.

The real, long-term problem in the UK housing market – rental or owned – is huge-scale government intervention and distortion of the market. Whilst this has occurred in a number of areas, the constriction of the supply of housing and huge manipulation via the planning system is the most serious cause of the UK’s housing shortage, as this IEA report shows. Even relatively sensible interventions to solve this problem, such as the Montague Report and the National Planning Policy Framework are unlikely to have any substantial impact without major planning liberalisation.

Will more state spending stimulate the economy?

Things look pretty grim in the economy right now, so naturally people want to do something about it. That 'something' seems to be more capital spending in order to stimulate demand and put 'idle' resources to work. That's a bad idea, as Prof Steve Horwitz (whose ASI lecture next month is now fully booked) explains in a blogpost for the LSE's EUROPP blog:

What advocates of stimulus are arguing is that we need spending, just any old spending, to jump start struggling economies. But this argument must assume that it does not matter which capital and which labour are brought out of idleness and into what sorts of activities. They must of necessity ignore the specificity of resources and their limited complementarity. It does us no good to try to force pieces together that don’t fit, as that’s what got us in trouble in the first place. And the point of doing a jigsaw puzzle of this sort is to get the pieces to fit in a way that forms an orderly pattern, not to simply use them all up.

The assumption in most stimulus spending is that there are projects just waiting to be pursued if only we would spend the money. What is overlooked is whether the capital and labour that are idle are the resources best suited to those projects, not to mention whether consumers and citizens even want those outputs in the first place. Just buying, hiring, and producing for the sake of “doing something” will create a structure of production that is quickly found to be unsustainable. A few projects may be “shovel ready,” but most will require engineers and others to do the planning. If the unemployed are mostly construction workers and financial managers, these projects will not be able to find the engineers they need at wages they can afford, and unemployment will not be reduced.

Many people talk about discarding the unrealistic assumptions of neoclassical economics when it comes to policymaking, yet they cling on to notions of aggregate supply and demand that have no bearing on reality. Like capital, labour is heterogeneous: some capital can help to make cars and some can harvest strawberries, but they can't be interchanged quickly or easily -- in the same way, some people are good at designing bridges and others are good at building them. If you treat them as one big lump, you'll make a mistake. Disaggregating the factors of production is key to understanding why Keynesian fiscal stimulus by and large hasn't worked so far.

In a non-homogeneous world, adjustment takes time. As Horwitz says, we can "free up competition, prices, profits, and losses so that entrepreneurs and others can finish the process of tearing down the mistakes of the boom and figure out how to reallocate those resources to their new best uses". I'm struggling to think of one major pro-competitive reform the Coalition government has made since 2010 that would speed up that tearing-down process, and they certainly haven't freed up prices, profits or forced bad banks to make the losses they need to. Maybe that points to why things seem to have gone so badly wrong.

President Obama's blue chart of death

The American Enterprise Institute's James Pethokoukis posts an updated version of the Obama jobs chart. Note the green dot — what the unemployment rate would be like without the early retirements and other people who, in one way or another, have decided to stop looking for jobs altogether.

Of course a stimulus fan would say that this simply proves that the recession was deeper than was initially believed. That's circular logic, but is surprisingly (or unsurprisingly) popular among the upper levels of the Obama Administration. Another interpretation would be that the stimulus made things worse, as I mentioned this morning. The third possibility, compatible with either of the other two, is that this sort of prediction is inherently bogus. Maybe we can't predict the future — and should stop acting like we can.

The Fountainhead comes to London

Ayn Rand seems to be everywhere these days. Paul Ryan, the Republican nominee presumptive for Vice President, is a fan (although his actions have often not matched his words); the world's media have become slightly obsessed with explaining how appallingly individualistic she and her writings were; and, best of all, the Adam Smith Institute's Ayn Rand Lecture this year was a roaring success.

So it's another feather in Ms Rand's overflowing cap that the movie of her book The Fountainhead is being screened in London on Saturday 15th of September:

The Fountainhead is an important and inspirational film – whose author, Ayn Rand, has shot into the public eye recently in the US elections.

The film features some of the best actors of the era, including Gary Cooper and Patricia Neal, and directed by King Vidor, the winner of eight international film awards. In 1979 Vidor was awarded an Honorary Academy Award for his “incomparable achievements as a cinematic creator and innovator.”

The story centres around Howard Roark, an architect who refuses to conform to the uncreative limits that others try to impose upon him. According to Ayn Rand, the author: “Whatever their future, at the dawn of their lives, men seek a noble vision of man’s nature and of life’s potential. There are very few guideposts to find. The Fountainhead is one of them. This is one of the cardinal reasons of The Fountainhead’s lasting appeal: it is a confirmation of the spirit of youth, proclaiming man’s glory, showing how much is possible.”

There are only 85 seats available, so things should fill up pretty quickly. Don't miss it.

Less theory, more reality

Picture the scene: you're in a room full of freedom-loving libertarians - the kind of crowd who unfailingly have an answer for everything -  and a fundamental question surges forth from your cerebral cortex.
'Just why are freedom and the free-market so good then?' Your question is met with a mixture of sympathy and incredulity. One might think this an unparalleled opportunity to extol the virtues of personal and economic freedom and the strength of the individual. However, the response is often lacklustre. In an almost automaton-like manner, void of inspiring message or conviction, the reply comes back: 'Well, you see, Hayek/Smith/Rothbard wrote about that in his book X. It must be true – it's all there in black and white!'

A response with decided limitations. In the often bubble-like environs in which an inspiring young, politically-minded person often find themselves in, this approach tends to go off without a hitch. Fellow like-minded people nod sagely and in agreeing tones affirm: 'it's true, you know. Mises did say that'.

This effectiveness, however, tends to diminish rapidly the moment you step outside of the postcode SW1. Were a similar situation to occur in my Midland home town, your Joe Bloggs would give any combination of the following three responses: 'who?', 'eh?', or a dull, cold stare.

But nor is it just about Mr Bloggs. If students, the most likely decision-makers of the future, are to be converted to the cause of freedom and liberty, throwing around names will achieve little. There is no reason to think that the alienation many of us feel when bombarded with the names of the left-wing holy-of-holies is any less alienating than others hearing about those we hold in such high esteem.

What we need are inspiring real-life examples. There are multitudes of these wherever freedom and liberty are allowed to flourish: the men and women whose inventions, made possible through economic liberty and the freedom of capital, directly benefited themselves and society as a whole; the poets, playwrights and painters who created great works of art, unmolested by restrictions on their conscience and granted independent thought. These are our ambassadors – those who made the watch on your wrist and shoes on your feet.

It is tempting to lapse back into the self-satisfied stance of thinking that we are somehow the enlightened few compared to those who are either too idle, too dim-witted or simply too far-gone to learn about freedom. This is nothing less than a monumental mistake. Many of us bemoan Westminster for being more a political club than a functioning organ of a representative democracy. Whilst not the sole remedy to this grievance, inspiring your man and woman on street of liberty is a crucial first step. Until then, the mental shackles put in place by decades of political misdeeds do not stand a chance of being torn away.

[Deirdre McCloskey wrote a fine example of 'Factual free-market' advocacy recently. — ed]

No nanny no more

Britons do not like nanny.  Despite decades of her telling us what foods we should eat, how much we should drink, and what lifestyles are safe, a majority of us wish she'd stop.  This is the finding of a new poll commissioned by the ASI.  Its full findings are well worth a look, but here's a snapshot.

71% agree that "It's up to me, rather than the government, to secure myself a job," and only 7% disagree.

51% agree that "I think most of my retirement pension will probably come from a pension fund I have saved myself," compared with the 22% who disagree.

Housing divides on party lines, with a majority of Labour voters agreeing that government has a duty to provide it, and a majority of Tory voters disagreeing.

Should government provide advice on what foods people like me should eat and how much to drink?  48% disagree and 22% agree.

The statement that "Politicians and Civil servants are well-equipped to make personal decisions on my behalf" finds only 9% in agreement, versus 65%who disagree.

Would young people like to run their own business?  Of the Of the 18-24 age- group, 49% agreed, versus 27% who did not.  Among 25- 39 year-olds some 44% agreed that they would like to do this, versus 30% who disagreed.

It seems that despite all the nannying, the British prefer to make their own decisions, and young people might well be out there creating the new businesses for our future prosperity.

The full paper can be seen here.

Why Funding for Lending will not work in the long run

The Funding for Lending Scheme (FLS), introduced by the Treasury and the Bank of England at the start of this month, aims to encourage banks and building societies to lend to UK households and businesses by allowing them to borrow from the Bank of England for up to 4 years at lower rates. These rates would be based on the amount that the banks lend out. In theory, this would allow many entrepreneurs to start new businesses that would be unviable without these lowered rates, as well as getting first time buyers on the property ladder.

The scheme has been coolly received by lenders, largely because of the track record for bureaucracy involved in previous government schemes of this nature. There have also been criticisms from the media, namely, that there have been no stipulations as to whom banks can lend to in order to receive their reduced fees, meaning some banks are aiming the savings towards trusted borrowers rather than new investors. To the libertarian, this seems more of a cushion to further market distortion, as the government backing banks to lend to anyone regardless of their ability to repay is what got us into this mess in the first place.

History and the Austrian school of economics tell us that when interest rates are artificially lowered below the market rate, people will simultaneously save less and invest more, but do so with false information about the market, as price signals become relatively distorted. Business schemes that would have been unviable with the higher borrowing rates now seem attractive, and so time preferences (i.e. whether one should spend now or save now) change to favour increased spending. This has a knock on effect on those whom the increased capital in the economy is spent on, usually those who work in the capital goods industries, who also start spending and stop saving. Sooner or later it becomes clear that bad investments have been made based on artificially altered interest rates and nobody has any savings to fall back on.

Our state financial institutions continue to prolong this depression because they refuse to see that it is their continued inteference that is keeping us here. The FLS scheme is the latest in a long line of projects, seceding the National Loan Guarantee Scheme (NGLS), that hope to realign their fundamentally flawed Keynesian cross to boost output. The policymakers pat themselves on the back as economic activity increases, not realising that it is leading those members of society that could bring us out of recession into ruin based on the false information that they send out. As such, regardless of their good intentions, policymakers need to realise that these schemes are not the solution to our problems.