Inequality's going to shrink on its own. Don't screw up by trying to do something about it.

I know, I know, inequality in the UK is claimed to be at the root of all evils. And we neoliberals are supposed to have been promoting it for our own ends. Possibly cackling with glee as we did so.

And if truth be told I have indeed been cackling at the results of our dastardly neoliberal actions. As I've pointed out repeatedly the last 30 years have seen the largest reduction in human poverty in the history of our species. Billions have progressed from starvation to a petty bourgeois three squares a day. Indeed, this has been a change of such titanic proportions that global inequality is falling. And yes, there has been a price for this: the rise in in country inequality. A price that I think is eminently worth having paid.That the global top 10% mark time (even if the global top 0.1% continue to power ahead) while some goodly portion of the 90% catch up does not dismay me in the slightest.

As an example of this analysis about inequality, here's Dean Baker:

But if technology and its demand for high skills are not to blame for the rise in inequality, then we have to look elsewhere for the culprits. One obvious source is globalization. Millions of manufacturing workers have lost their jobs to low-paid workers in Mexico, China and elsewhere. Some argue that this is a natural, inevitable market process. But it is not. It is a policy choice. Yes, there are tens of millions of people in the developing world who can perform the same tasks as our manufacturing workers for a fraction of the pay.

This has put downward pressure on the wages of our own low skill workers and explains that rise in in country inequality. However, this is just about to change. As China goes through its Lewis Turning Point:

China is on the eve of a demographic shift that will have profound consequences on its economic and social landscape. Within a few years the working age population will reach a historical peak, and then begin a precipitous decline. This fact, along with anecdotes of rapidly rising migrant wages and episodic labor shortages, has raised questions about whether China is poised to cross the Lewis Turning Point, a point at which it would move from a vast supply of low-cost workers to a labor shortage economy.

As and when China becomes a labour shortage country (2020, 2025 they say) then wages there will soar. Wages soaring for 1.3 billion people is of course good for 1.3 billion people. But it also relieves some to most of the pressure on the wages of our own lowly paid. Thus we can expect the pay of our own lowly paid to rise, reducing inequality.

Another way of putting this is that low wages in China caused some to most of the rise in inequality here. As Chinese wages rise that cause, thus the inequality, will go away.

The point being that if inequality is one of those things that you do worry about it is going to lessen anyway in the coming years. There's no need to do anything to make it happen. It's simply a natural by-product of China getting rich. And as India, Indonesia, sub-Saharan Africa, follow in those footsteps then inequality in the UK will diminish markedly. Which brings us to a strange place really.

If you want to reduce inequality in the UK you should be gunning for the industrial development of the rest of the world. For as other countries develop the downward pressure on UK wages abates. Which is, of course, the true deceit of the neoliberal plan for the New World Order. That we all of us get stinking rich. Cunning, eh?

Private schools are revolutionising developing world education. If only UNESCO would admit they exist

A so-called ‘fact sheet’ on education in Nigeria published by UNESCO in October 2012 suggests that Nigeria has some of the worst education indicators in the developing world.  For example, since 1999, the number of out-of-school children has increased from 7.4 to 10.5 million, which means that Nigeria now has the largest number of out‐of‐school children in the world.  Unfortunately, these statistics fail to take into account the thousands of unregistered low cost private schools that exist across Nigeria and the millions of children who attend these schools.  Consider, for example, the following findings from a census of private schools in Lagos State carried out by DFID in 2010-2011:

The table shows that the vast majority (88%) of schools in Lagos State are private and they cater for 57% of all enrolments.  Most of these schools are owned by individual proprietors and serve low income families.  The report therefore concludes that ‘the education landscape in Lagos is dominated by the private sector, with the majority of pupils attending private schools of all types’.  Critically, 74% (8,952) of these private schools are unregistered and therefore not included in the official statistics.  If the average number of children in these private schools is 114 then this would suggest that over 1,000,000 children in Lagos State alone are not out of school but attending unregistered fee paying private schools.

Further research carried out by DfID in Kwara State also estimated that there could be a possible 417,600 private enrolments, compared with the official school census from 2010/2011 which only recorded 157,327 children in private schools.  This would add another 260,000 children who are not out of school but attending unregistered fee paying private schools.   There are thirty six states in Nigeria and my guess is that if similar research was carried out in each state then the total number of out of school children would be dramatically reduced to a fraction of UNESCO’s original figure of 10.5 million - which is clearly bogus and in no way, shape or form reflects the reality on the ground. 

So what could possibly explain such an extraordinary level of incompetence on behalf of UNESCO?  First, UNESCO benefits from exaggerating the extent of the so called global education crisis because they are the international agency tasked with solving the problem.  Without an education crisis and UNESCO would quickly become redundant.    Second, by widely exaggerating the number of out of school children, this also allows UNESCO to point the finger at Western donors for failing to meet their funding commitments.  This also helps to deflect attention away from the enormous problems facing government education sectors across the developing world including rampant corruption, teacher absenteeism and an almost unbelievably low level of learning - problems which UNESCO have failed to address over the previous half century. 

Finally, UNESCO’s legendary anti-capitalist bias used to manifest itself in direct hostility to all forms of private sector involvement in education.  Today, their opposition is much more civilised – they simply turn a blind eye to the remarkable growth of private schools for the poor across the developing world and instead continue to preach to the world in blissful ignorance and in a complete state of self-denial.

We don't need repatriation from the EU – we need de-patriation

The debate over the UK's relationship with the EU has stepped up. The PM has adopted the position of negotiating with the EU with the threat of an in-out referendum in his pocket. Personally, I think Cameron is just about in the right position, in theory. As Eric Pickles has argued, quite sensibly, EU membership should be on a cost-benefit basis. If it is clearly the case that withdrawal would benefit the general good more than remaining in the EU we ought to withdraw and vice-versa, regardless of any special-interest privileges.

Whether Cameron can make this work in practice is unlikely. After all, the EU is a large and growing bureaucratic institution with many vested interests operating within it - bureaucratic powers are unlikely to be ceded any more easily in Brussels than they are in Whitehall.

The finer points of the political debate notwithstanding, there is definitely something missing from the debate. On the one hand, there stands a massive, wasteful, unresponsive bureaucracy led by profilgate politicians in hoc to special interests. On the other hand, there is the EU. The problem with the EU is not that it has absorbed powers which should be vested in Whitehall but that these powers are vested in any government whatsoever. The principle of subsidiarity should be extended to its ultimate conclusion - the proper authority for all bar a few aspects of socio-economic life must rest with individuals, not governments be they local, national or supra-national. What the UK and the EU needs is not repatriation of powers but (to coin a clumsy neologism) 'depatriation'. There is no point removing powers from Brussels and handing them over to politicians and bureaucrats in the UK. These powers should simply be handed back to where they belong, in the hands of individuals.

I would be very happy to be a fully paid-up member of an EU and even a Eurozone that, say: operated a sound, gold-backed currency, ferociously enforced fiscal discipline, liberated markets, open doors to trade and migration, drove privatisation and de-regulation across all areas, decriminalised drugs (well said the Lords, on that subject) and generally pursued free-market and classical liberal policies.

Sadly, that's just wishful thinking but it is not as if the British government under any party is likely to follow this course either. On balance, especially given the nature of many EU governments and societies and the EU itself, it is probably more likely that this would occur under a UK government than under a federal EU one even if the UK's track record on this score is fairly poor. Ultimately, Britain faces a Hobson's choice between large and profligate EU governance and large and profligate British government whilst under present conditions it is saddled with both. 

If we paid for doctors we'd forget the stiff upper lip

This week a medical journal reported that the British 'stiff upper lip' contributes to its low cancer survival rate. It seems that people simply don't want to bother the doctor when they feel ill. So their cancer goes undiagnosed, and the chances of survival diminish.

I know the feeling. I am registered with an NHS general practitioner, but now I usually go instead to a private doctor when I am ill Yes, it's expensive at £100 a go. Yet I find myself going to the fee-for-service doctor more than I ever did to the 'free' NHS one. It's not that I'm sicker. I am just more inclined to go.

Why? Well, there are costs other than money. With the NHS doctor, the first problem was getting through to the surgery on the phone. The line nearly always seemed to be busy. When you did get through, you could rarely get an appointment within the next two days. You did not know which doctor you would see. When you were seen, and discovered you needed antibiotics, the doctor would be reluctant to prescribe them. If you did coax out a prescription, you would have to traipse along to the chemist and wait to pick it up. Add up all that time and hassle, and visit to the 'free' NHS doctor became very expensive indeed.

For my £100, though, I get a phone that is answered immediately, an appointment the same morning, the doctor of my choice and, if I need medicines, they are handed to me there and then. Job done.

But there is something other than mere financial and time/effort cost in this equation. I reckon that there are many people with more serious conditions than my niggling cough. I can well see that, when medical services are rationed by queuing rather than by price, responsible citizens like me might well figure that we don't want to waste the doctor's time when there are much more deserving folk. It's another reason why I found myself simply not going, when I should have done.

I have no qualms at all, though, in going to my private doctor. It is a straight commercial transaction: I want medical treatment, this person is prepared to sell it to me. The price clears the market, and no other patients of that doctor are denied appointments or told to come back in three days. And I am treated as a valued customer rather than a necessary inconvenience.

Just maybe, if people were expected to pay for general practitioner services, they might forget the stiff upper lip and demand the medical care they actually needed.

Brute force open-access

The fact that governments intervene in one area gives them an excuse to intervene in another. The demand that all car passengers, including those in the rear seats, should be compelled to wear seat-belts was justified by the observation that taxpayers supported the National Health Service, so if a passenger was injured in an accident, it would be a cost on us all. Laws banning smoking, and this week's proposal to put a tax on sugary drinks, are other examples that use the same justification.

Now the universities minister David Willetts is causing a stir in academe with his plans to force through open access. At present, academics do their research and try to get it printed in various academic journals. The more prestigious the journal, the more the paper is scrutinised through peer review, so getting printed in a good journal is some indication of quality. It is a costly process, and the leading journals can be quite expensive for libraries to buy, but at least the research that does get published is reasonably reliable.

However, Willetts takes the view that, since since we have a taxpayer-funded university system and a taxpayer-funded set of research councils, anything the academics produce rightly belongs to the public and should be made immediately and freely available – what is called 'open access'. The universities will not have to pay to get articles processed, and their libraries will not have to pay for the expensive journals, but they will have to pay to make the research available.

So it is quite probable that many of today's journals, and the learned societies that sponsor them, will simply disappear – which may help explain why a dozen of them have written to the government to complain about the idea.

Many academics have already opted for an open access policy (a policy practiced by the Adam Smith Institute too), since they want to get their work and ideas out to a wide audience. But often, papers are put online without proper editing – because the authors are not professional editors – which means that mistakes creep in (something that can be potentially dangerous in, say, medical or engineering research papers online). And the research goes up without proper peer review that might expose fundamental errors.

Academics will find that it is their university colleagues, not anonymous expert peers in the field from all over the world, who decide what goes online – but university jealousies can be very bitter.  If there is no effective peer review, it will be hard to know which research is reckoned to be reliable and which is not. All papers that go public will have to be treated as potentially suspect. Mind you, in economics, some of us came to that conclusion many years ago. Perhaps David Willetts would be better employed making sure that research projects were a proper use of taxpayers' money, rather than bullying his university employees about how they present it.

More tangle for the tax thicket

A Taxpayers’ Alliance report released today finds that the government has raised taxes 299 times since May 2010, and only cut taxes 119 times.

I’m not surprised about the direction of changes to the tax code, but the sheer number of tax increases is really quite amazing. Eight years ago, George Osborne said he was in favour of “simpler and flatter taxes”. I’m not sure what happened to that.

It’s staggering to see how many of the new taxes have been designed to shape people’s behaviour. Almost everyone in British politics assumes that they have the right to impose ‘good behaviour’ on the great unwashed. As a result, we get rises in alcohol and tobacco duties, and this week’s proposals for a tax on sugary drinks. This is very muddled – pleasure is entirely subjective. One man’s binge drinking is another man’s pleasant Saturday night out.

One of the big appeal of flat taxes is not that they eliminate the different bands of income tax, but that they get rid of the thousands and thousands of pages of exemptions and special rates that complicate the system, pervert incentives by encouraging inefficient economic activity, and create deadweight losses in the shape of high costs of complying with complex tax codes.

You could, theoretically, have a ‘sort-of-flat-tax’ that kept two bands and a tax-free personal allowance, but got rid of every special tax and special exemption, with the savings going towards a raising of the personal allowance. That might be more feasible than a true flat tax with a single tax rate, but would still have most of those advantages. Unfortunately it looks as if we’re going the other way.

Quote of the day

"Wherever producers have secured any power, they have used it to limit production, to enhance prices, and, in a word, to rob the rest of us. Power in the hands of producers has never been employed except to limit the wealth of the whole community. No force known to economic science or to experience, except the force of competition, has ever done anything to keep producers in order, and without competition they have always contrived to limit their production and to diminish their contribution to the commonwealth."

Publisher Sir Ernest Benn (1875-1954), Why Freedom Works

Let them drink Coke

A campaign group – you know, one of those bodies that sounds official but isn't, and is stuffed full of folk on the public payroll – wants to put a 20p tax on bottles of fizzy drinks. It's to combat obesity, they say.

No, it's about micro-managing our lives, which 'experts' always believe we are unable to manage for ourselves.

The average person gets about 2% of their calories from fizzy drinks. Sure, some people drink a lot more. But will a 20p tax dissuade them? No, it is just a stealth tax at a time when we are over-taxed already. People have strong favourites in soft drinks, and studies show that the tax needs to be a lot higher to make people switch. Even then, they just switch to other sugary but untaxed drinks.

Proponents say the tax would raise £1bn that could be spent on diet education for children. I doubt if any of the money would actually get to that destination. Just think about it:

Presumably some soft drinks will be hit, some not (as there are low-calorie alternatives on the same shelves). The Department of Health will want to set up a quango to decide which should be taxed. Then shopkeepers, who are struggling enough at the moment, would have to separate taxed from untaxed drinks and account for the tax. Then send it to the Revenue, which has to account for it and then send it on to the Treasury, which has to earmark it and send it to the Health and Education departments. They will each need a bureaucracy to decide how to spend it, and another bureaucracy to run the programmes, and a third monitoring bureaucracy to make sure that the money is spent properly. All the tax will really buy is £1bn-worth of bureaucracy.

If we really want to help our children, a better way might be to get bureaucracy out of our hair and pay down the national debt, which saddles every newborn with a £17,600 bill.

Denmark introduced a 'fat tax' a year ago but it was so unpopular that they have now scrapped it. It was supposed to hit things like crisps and chips, but actually was applied to meat, yoghourt, even gourmet cheeses. North German supermarkets did a roaring trade as Danes shopped abroad to escape the tax. Specialist businesses selling meat or cheese were badly hit.

And as our report The Wages of Sin Taxes notes, a tax on soft drinks hits poor families the hardest. Groceries, food and drink, is a much larger part of their budget. But it would not make a scrap of difference to the middle-class campaigners who are advocating it.

It's soda today, what's it going to be tomorrow? Chocolate? Cake? Cheese? Bread? Milk? Spare us, please, to get on with our own lives.

Why corporations avoid tax

When you calculate the depressing effect of company taxes on incentives and economic growth, you can see why businesses resent them – and indeed do their best to avoid them. The point was brought home to me when I re-read Why Freedom Works by Sir Ernest Benn (1875-1954), a successful publisher (and uncle of the Labour politician, Tony Benn).

One trouble with corporate taxes is that companies that make a profit see themselves taxed, while companies that make a loss have to bear it. Benn imagines three companies, each with a capital of – let's make the numbers easy – £100m. Two make a 10% profit of £10m, the other makes a 10% loss of £10m.

It is the 10% profits that politicians look at when thinking about the impact of corporate taxes. It seems a juicy enough return to be taxed. But just a moment: in reality, the £300m invested by the three companies actually produces total profits of just £20m – a rate of return of just 6.66%. Taxing this rate of return seems rather meaner.

And it gets worse. The net profit of the three companies is actually just £10m (£10m+£10m-£10m = £10m). So in fact the £300m capital has produced a net return of only £10m – just 3.33%. Taxing that looks positively perverse. After all, business does not guarantee anyone a job or a return for life. There are ups and downs, profits and losses all to be borne. If entrepreneurs figure they are likely to succeed just two-thirds of the time – which is optimistic – their successes will need to earn enormous profits for them to carry a tax burden like that and still have some reward left for their efforts.

Yet the entrepreneurs who stumped up the £300m capital for these three businesses actually get rather less than the £10m in total profit. By the time they have lost half their income to income tax and national insurance, their net return is £5m (£10m after tax)+£5 (£10m after tax)-£10m (untaxed), which is a total of...er, nothing. It makes you wonder why anybody does it, really.

So maybe it is not so surprising that entrepreneurial companies try to avoid the UK's corporate taxes. Or, which is easier, elect to move abroad and trade somewhere else.

Chart of the week – deposits in US commercial banks

Summary: The growth of deposits in US banks continues to accelerate. The numbers imply healthy broad money growth, eventually translating into activity.

What does the chart show: The chart shows the thirteen-week (ie, three-month) annualised rate of change of deposits in US commercial banks. The red line is total deposits, the blue is large time deposits (ie, deposits in excess of $100,000) and the green line is other deposits. The thirteen-week annualised rate catches the most recent trends, but can be volatile.

Why is the chart interesting: Broad money is a leading indicator of economic activity. Broad money consists of the bank deposits of the private non-bank sector (ie, households and non-bank companies) and of cash. But of these two, cash is just short of 1.1 trillion dollars, while deposits total some 12.3 trillion dollars and are therefore vastly more important. Since early December, deposits have grown by double-digit rates. This is a clear indication of continued healthy, if not spectacular, US activity in 2013. The threat of the fiscal cliff is very much a myth.

Chart and comments provided by Stein Brothers (UK), www.steinbrothers.co.uk