Milton Friedman was born 101 years ago today. The video above isn't as snappy as many of the great Friedman videos online, but I like it because it shows the kind of libertarian Friedman was. Instead of dismissing any policy that fell short of abolishing the state as 'socialism', he came up with innovative and practicable steps towards a freer and richer world. His policy proposals are still relevant and fresh (unlike many of FA Hayek's, for instance) — as a replacement for existing welfare, a Negative Income Tax today could liberate people from the benefits trap. Daniel Hannan's piece on Friedman and school vouchers — another idea as fresh and important today as it was when he first proposed it — is well worth reading too.
Let's talk about cartels
We generally think that cartels are a bad idea: they're one of those conspiracies against the public that happen when businessmen meet together for pleasure and the like. There have been though those who insist that cartels are just absolutely great. They ensure decent profits for investors and unions can also claim a share of those profits in the form of "good jobs at good wages". Monopolies are just an extreme form of that cartel idea of course, where the cartel is within one firm. And the people who think that those cartels are a great idea really do scan the ideological spectrum. It's implicit in Fascist economics, such as there is an economics of fascism. It's what Roosevelt tried to do with the National Recovery Act (no, I am not trying to state that Roosevelt was a fascist, only that in his approval of cartels he had a similar policy to one followed by Mussolini et al) and it's implicit in all those calls for nationalised industry in Dear Old Blighty, where we can go back to the unions extracting some percentage of the monopoly profits for the labour force.
But we're just seeing a cartel breaking up, right before our very eyes. The potash cartel that is, a vital ingredient of fertilisers worldwide:
OAO Uralkali, the world’s largest potash producer, upended the $20 billion-a-year industry by ending limits on production that underpinned prices and halting cooperation with Belarus that controlled supplies from the former Soviet Union. The decision sent shares of potash producers plunging as much as 27 percent from Israel to Germany to Canada and the U.S. as investors speculated a flood of supplies will lead to prices will sink for potash, a soil nutrient that strengthens plant roots. Uralkali, part-owned by billionaire Suleiman Kerimov, said it exited the venture after Belarus undermined the sales agreements.
The shares of all of the producers plummeted. Clearly, the market was entirely sure that the cartel propped up profits. And the price looks set to fall substantially of the product itself:
“We see the potash price may fall below $300 a ton after the change in our trading policy,” Uralkali Chief Executive Officer Vladislav Baumgertner said. That’s at least 25 percent below the current contract price for China and the lowest since January 2010.
The global market is around 34 million tonnes. Assume that $100 price drop talked about there: that's $3.4 billion that's going to be transferred from the pockets of the producers to the pockets of the consumers. Now what was it Adam said, ah, yes, the sole purpose of all production is consumption and the interests of the producer must only be attended to so far as they are vital to the consumer, or something along those lines, wasn't it?
The breakdown of just one single cartel makes consumers $3.4 billion better off it seems. Which is really why we don't like cartels and monopolies, even if they do end up providing "good jobs at good wages".
Fair trade really isn't the way to do it
There is, as we all know, something called Fair Trade out there. The idea being that you make sure that you're buying only from poor farmers who meet your own moral standards (on things like diversity, sustainability, whatever) and that you'll pay them a bit more for their producing as you would like to see things produced.
This is, of course, just quite lovely. For it is you exercising your consumer choice, spending your pennies as you wish, to make the world a better place according to your lights. We all here support you doing exactly that.
However, you might want to have a little think about this in hte lights of these quite astonishing numbers:
An interesting statistic is that in 2010, retail sales of fair-trade-labelled products totalled about $5.5 billion, with about $66 million premium -- or about 1.2 percent of total retail sales -- reaching the participating producers. There has to be a better way of helping poor farmers. Having only 1.2 cents out of every dollar spent on fair-trade products reach the target farmers is a hugely inefficient way of helping these people. If people wish to help these farmers there has to be charities out there that can transfer more than 1.2 cents per dollar to them.
It may well be that you are exercising your consumer choice as a way to make the world a better place. It's just an incredibly inefficient method of doing so and thus you might want to reconsider that plan.
My own supposition is that the reason Fair Trade is so appallingly inefficient is the number of Interchangeable Emmas who have to be paid from that money supposedly going to producers. It takes very many poor coffee farmers' incomes to pay for the PR bod advertising Fair Trade coffee from an office in central London. It might well be better to simply do as Madsen urges, and buy things made by poor people in poor countries. Then send the money saved by not paying the Emmas off to a charity of some minimal efficiency. Or even, if coffee farmers are really your thing, simply drink an extra cup or two a day and send the money by increasing demand for their production.
You really cannot just plan economies you know
It's one of the standard conceits that the man with a plan can make society better for us all. The standard response to this conceit is Hayek's point, that no one can have enough information in sufficient time to be able to make or manage such a plan. That's why we have to use markets as they're the only information processing and calculation engine we've got that is capable of doing the job. There are, of course, people who prefer to shout that Hayek's all wet and that their plan would undoubtedly work. Fortunately we've already run the experiment, we generally call it the 20th century, and we now know that Hayek was indeed right.
All of which leads to this interesting little tale:
Migration statistics are "little better than a best guess" and probably understate immigration to the UK, a parliamentary report has revealed. With immigration again set to be a key battleground during the next election, a report released today by the Public Administration Select Committee warns that the statistics are not fit for purpose.
Because of the unreliability of the figures, the report adds, the Government should aim for a target of 50,000 if it wants to reduce immigration to under 100,000 by 2015. Estimates of immigration, emigration and net migration are primarily based on a sample of 800,000 people interviewed at ports and airports each year, known as the International Passenger Survey. But only about 5,000 of those tend to be migrants and, in addition, the report comments, these "may be reticent to give full and frank answers, to say the least".
This means that the Office for National Statistics and the Home Office are producing "blunt instruments for measuring, managing, and understanding migration to and from the UK", which do not, the report says, measure the impact of migration on local areas, the social and economic impacts of migration or the effects of immigration policy.
Or as we might put it, we cannot "manage" immigration or the effects of it because we've got no clue at all about how much of it there is. We don't, in fact, know how many people there are in the country, let alone how many of them are native born (it's actually Polly Toynbee who has been saying for years that sewage processing requirements show that there's more people in the country than there are on the books). In such circumstances we simply cannot go about trying to manage things like housing: given that we've no clue of the number of people we can't decide how many houses and or flats there should be. We can only start to look at what the markets are telling us: prices are rising, in fact are at Ungodly levels, and so we need to have more houses and or flats.
How many more? I don't know, you don't know and the government can't possibly know. Just more until we stop having house price inflation.
I should end here with a clarion call to something or other. But I'm not sure that this rises to that level: perhaps a clarinet call. We really have run that experiment about planning and markets. Given that we've received the results, can we please start paying attention to them? We simply do not have, cannot have, the information we need to plan things. That's why we have to use markets.
Simples really, isn't it?
Chart of the week: EU debt/GDP ratios rising
Summary: The UK’s debt/GDP ratio fell in Q1; in most of the Eurozone, it rose
What the chart shows: The chart shows consolidated general government debt/GDP ratios in the UK and the euro area as %
Why is the chart important: One of the main consequences of the Great Recession has been an explosion in public debt. For the time being, the burden of this debt has been eased by ultra-low interest rates. However, at some stage, interest rates will begin to normalise; at that stage, debt – which regularly needs to be rolled over – will become increasingly expensive for governments to service. It is therefore crucial to at least bring the rise in debt under control as soon as possible. Latest data from Eurostat show that UK government debt/GDP fell slightly in Q1 this year. Faster output growth in Q2 means that it almost certainly fell slightly more in Q2. By contrast, for the euro area as a whole – and for all of its members barring Germany and Estonia – debt continued to rise. While output growth is the acute problem, debt is becoming a chronic one which will ultimately have to be dealt with – through repayment or default.
Modern religion is just so confusing
You know I'm sure that somewhere in the foundational documents of Christianity somewhere there's a story about how the money lenders and the Temple aren't supposed to be too closely entwined. I think that was one of the stories beaten into me over those years at the hands of the monks at least, vague memories of shouting and tables being over turned as our man JC told them to get out of his father's house. But here we have the new Archbish of Cantab insisting that the Church of England should actually become the money lenders. Shrug, I guess tempus fugit after all. Jan also had a joke about this idea as well.
However, underneath the inherent silliness is something much more welcome, a definite antidote to the increasingly shrill calls from the likes of Stella Creasey that payday lending must be abolished by legislative fiat. For what the Rev Welby is actually saying is that he wants to drive these lenders out of business by competing against them, not by hoodwinking credulous MPs into stealing away someone's livelihood. Welby is insisting that such short term and low value lending can be done at much lower prices than the current companies manage it. This would be to the benefit of the consumer, as competition always is, and this would thus be a good thing. And we around here do have a habit of welcoming goods things, whatever direction they arrive from.
So, after the sniggers have died away, full marks to Cantab.
Except for just one little detail: I'm entirely unconvinced that it will indeed be possible to offer such low value and short term loans at rates appreciably different from the current providers. It's absolutely possible to offer larger sums at lower rates: it's also entirely possible to offer longer terms at lower rates. But there's an inherent problem in small sums for short terms. There's some overhead to the making of any loan. Some irreducible minimum that it costs to make the decision to grant or not grant the facility. And the shorter the time period and the lower the sum then the more that minimum cost will be as a percentage. And, given the way that APR works, it becomes some vast percentage when a 1 week loan is calculated as if it is a series of 52 one week ones (which is pretty much what APR does).
I've seen a report that Goodwill (think charity shops) tried this in hte US and found that APr was well over 130% without even charging interest, let alone trying to make a profit. So I wish the CoE all the luck in trying to compete in this payday loans market. But I do think that they're not going to get very far. Simply because the costs of lending small sums for short time periods are inherently high.
We don't want a financial transactions tax because it's an extremely bad idea
The buffoons who are our elected politicians are calling again for a financial transactions tax. The only problem with having such an FTT being that it's an extremely bad idea.
In a report that calls for the Government to implement the Kay recommendations, MPs have called for the Government to consider imposing an FTT to help reduce high frequency trading. Professor Kay, whose report into short-termism in equity markets was published last year, did not contain any mention of the FTT. But Adrian Bailey, chairman of the Committee, said he had found support for the tax during evidence sessions. “The Government should assess the likely impact of the introduction of a Financial Transaction Tax and how the obstacles to its implementation can be overcome,” he said.
There's no particular problem with implementing an FTT. It's just that it's a very silly thing indeed to try and do. As the House of Lords Committee which looked at the same subject pointed out:
A European tax on financial transactions could cost Britain’s economy up to 20 times the amount it raises, a committee of lawmakers said on Friday. Britain has said a transaction tax, dubbed a Tobin Tax after the U.S. economist who devised it in the 1970s, would only work globally and the EU plans are “deeply confused.” Britain is fiercely opposed to the proposed financial transaction tax (FTT), which the European Union said could raise 57 billion euros (49 billion pounds) a year if implemented across the bloc. “The FTT is likely to induce a loss in GDP between five and 20 times larger than the revenues raised from the tax,” according to an economic sub-committee of the House of Lords, the upper chamber of the parliament.
Perhaps part of the difference here is that I was asked to prepare evidence for the HoL report and did so, while the HoC one seems to have had no one who understood the EU's own report into said FTT. That EU report stating that by imposing an FTT the economy would be smaller than it otherwise would be and that the tax revenue losses from said smaller economy would be substantially larger than the direct revenues from the tax. The FTT is thus a method of reducing tax revenues. We even have a pair of Nobelists (Mirrlees and Diamond) insisting that transation taxes are in and of themselves a bad idea.
Or, as we might more cogently put it, the FTT a damn stupid idea that we really don't want to implement.
Is the NHS really the kind of health service we want?
Half of Britain's family doctors, according to a survey this week, now believe that their patients should be charged to see them. Their workload, they complain, has become 'unmanageable', their waiting rooms clogged up by people who have very minor ailments and do not need to be there.
I write this from a car repair shop outside Cambridge. I had a problem with my car, so I called up yesterday and made an appointment, to suit my convenience, for 8am today. I rejected the offer of a courtesy car while mine was being looked at, but was invited instead to spend the intervening hour in their gleaming air-conditioned customer lounge and to help myself to coffee, tea, sandwiches, biscuits, fruit juice and lots more besides. So I have been reading the newspapers, watching the TV news, and I will shortly be sending this to the blog on the free customer wi-fi. Through the plate glass window I see the engineer plugging various computers onto my vehicle to find out exactly what is wrong. The fee for that hour of his time and all that customer service? £50 (including VAT). The difference between this and a doctor's waiting room could hardly be more stark. If I could pay a fee to get that kind of service from the NHS, I would be absolutely delighted.
Britain has a National Health Service that was constructed during the years of wartime austerity (which was real austerity, not the bogus 'austerity' we are told we are experiencing today), and it presumes that most of us are on the breadline. But there seems no shortage of people who, like me, are willing to pay £50 to sit in comfort while their car is fixed. Do we really think they would not pay £50 to get the health of their own body diagnosed? The first thing we need to do is to take the middle classes out of the free healthcare scam and focus our resources on people who genuinely can't afford a doctor.
As for them, just look round the world – there are innumerable ways of making sure that people who cannot afford the full cost of medical care still get it. In France you pay, but get a rebate if you are on low income – so you are aware of the cost, but do not suffer it. Other countries have insurance systems in which the state pays the premiums of the hardest-up. Britain's trouble is that nobody has the faintest clue how much medical care costs, so don't think about whether their sniffle is really worth the doctor's time and the taxpayers' cost.
I find myself visiting the doctor more, now that I have given up on the NHS and pay privately. Instead of fearing that I might be wasting the doctor's time on something minor, I know that the doctor is pleased to see me because I am a paying customer. It doesn't cost a huge amount, in fact – nothing like the £150 charge that the NHS doctors survey worryingly suggests. But like the car showroom, I get seen immediately in pleasant surroundings and get treated as a valued customer by someone who is not overloaded and stressed out. Isn't that the sort of health service we want?
Holy Credit!
So Archbishop of Canterbury Justin Welby wants to make the Church of England’s property available for Credit Unions so they can wipe out those dastardly payday loan sharks. This is a brilliant idea with wide-ranging opportunities for both entrepreneurial clerics and banks.
Just consider the convenience for consumers of banking and praying at the same time. After the queue for communion, you simply shuffle over to the bank teller next to the altar to pick up your loan or maybe deposit whatever spare change you have after passing the collection box.
Meanwhile, over in the confessional, the priest can follow up an absolution prayer with a financial product pitch – “Have you considered insurance for seven years of drought?”
Recruitment of young folk into the priesthood has become a real problem for the Church but Credit Unions on site offer an added attraction in the area of branch security. Wearing body armour under cassocks, learning a martial art or designing bank vaults disguised as crypts will broaden the profession’s appeal.
Of course, established banks won’t be sitting still against this new competition on the High Street. Many branches surely have space available for any number of religious sects to set up shop.
What depositor with a bag full of cash could resist first lighting a candle in the hopes his deposits won’t attract the attentions of the taxman? Impatient couples could stop off at the on-site wedding chapel before opening a joint bank account.
Imam calling for midday prayers while you’re stuck in the queue behind the old lady counting out thousands of pennies? No problem – step aside to our prayer rug area and we’ll hold your place in the line.
And what customer wouldn’t appreciate an evangelical choir lifting the spirits before meeting the bank manager about those persistent overdrafts?
Keep those ideas coming, Mr Welby!
The unprecedented $60 trillion of costs of Arctic melting
Much ado about a new study published in Nature. Arctic melting could lead to methane emissions which would cost the world $60 trillion. This is an unprecedented danger say scientists. Sadly, whatever one thinks of the scinece in this, those damages aren't unprecedented at all. Indeed, they're already written into the costs which we use to worry about what to do over climate change.
But, they say, economists are missing the big picture. "Neither the World Economic Forum nor the International Monetary Fund currently recognise the economic danger of Arctic change. [They must] pay much more attention to this invisible time-bomb. The impacts of just one [giant "pulse" of methane] approaches the $70-tn value of the world economy in 2012", said Prof Gail Whiteman, at the Rotterdam School of Management and another author.
The problem with this assertion is that all of the standard estimations do indeed include damages like this. Let us take the Stern Review for example, that's the one that tends to be used as a benchmark (and is indeed the benchmark that these scientists have used). In that Stern Review, drawing from the estimates in the Special Report on Emissions Scenarios, the assumption is that the global economy will grow by some 5 to 11 times over the course of this coming century. Global GDP will be between $250 trillion and $550 trillion. Stern then says that the damages from climate change could be as much as 20% of this sum. That is, that GDP would have been in that range but will now be in the $200 to $400 trillion range. Note that that is his worst case argument.
And here we have an estimate that damages could be $60 trillion over a 50 years time period: say, $1 trillion a year with a bit of rounding. Or one half of one percent to one quarter of one percent of global GDP. We have already got this included in our top whack estimate of damages of 20% of future potential GDP.
All of which brings us to the real point at the heart of the entire climate change discussion. No, not whether it is happening or not: let's leave the range of possibility open from nothing is happening at all all the way through to the sort of disasters being predicted here. It is still true, wherever on that spectrum we are, that we want all humans over time to be just as rich as is possible. We are therefore trying to balance the costs of not doing something about climate change against the costs of trying to do something about climate change. And as these century long figures show there are significant costs to both, or at least potentially there are.
But we should be measuring the costs of doing something as against the loss in GDP which doing something will cause. Just as we should be measuring the costs of not doing anything against the cost that not doing anything will cause. It's worth trying to avoid such methane releases if the cost of doing so is less than the economic growth that will be foregone. Which is where throwing around numbers like $60 trillion becomes unfortunate. For it's a cost over many decades: $1 trillion a year is more reasonable to use. And compared to the benefits that economic growth is going to bring to our descendants that's however large it is in one manner, really rather a trivial figure.