You've got to understand a problem before you can try and solve it

We've yet another dodgy report from yet another dodgy think tank being written up today. You know it's dodgy when the writye ups, to create the narrative, arrive before the full paper can be checked to see what they're really saying. But here's part of the report:

While most people will live to state pension age and beyond, a large proportion are unlikely to get there in good health, especially in more disadvantaged parts of the UK – places like inner city Glasgow, where the healthy life expectancy is just 46.7 years – close to 20 years lower than the national average of 65.

No, that's not really true.

The difference in disability-free life expectancy between women born in the most and least deprived areas was 11.6 years in 2001-04. By 2007-10 it had increased to 13.4.

And that's absolutely not true. The problem, here is that no one is understanding what these numbers are, how they're collected, and they are thus using them in highly inappropriate manners.

Lifespan, healthy lifespan, these are not the numbers from people born in certain locations. Nor of people in certain income bands, social classes or anything else. They are collated from the places and ages at which people die. It's vital to understand this difference.

As an example, consider two people who live at some point in their lives in those inner-city areas of Glasgow. One is born there, joins the Army, retires to Eastbourne and dies at 90. The other is born in Eastbourne, drifts along, gets tied into drug addiction and dies at 40 in some squat in Glasgow with a needle in his arm.

That first person, given that we count these things as where people die, leads to the average age at death in Eastbourne rising: that second, for the same reason, lowers that average age at death in Glasgow. But clearly and obviously neither of them have anythiing at all to do with the average age of death in their birth places. And yes, people do indeed move around: and one of the greatest prompters of people moving is a change in their economic circumstances. So, therefore, a goodly part of what we're seeing here when poor areas have lower lifespans than rich ones is not that living in a poor area kills you but that people self-select into poor or rich areas based upon their wealth.

Another way of approaching the same point is to consider the mistake that Michael Marmot has been making for decades. There is most certainly a link between economic inequality and health inequality. Living in a disease ridden slum will indeed make you more susceptible to said diseases. However, there's also an obvious link between health inequality and economic inequality. One acquaintance was hit with a series of severe illnesses in his mid-40s. Sufficiently bad that he entirely dropped out of the workforce for four years. All terrible of course: but his subsequent economic inequality was a result of his initial health inequality, not the other way around.

If we start to assume that this lifespan inequality is a direct and sole result of economic inequality then we're going to get any plans to solve it all entirely wrong. It's vital that we also accept that health inequality happens, as does movement of the population, and that both of these will lead to the economic inequality that we see.

Why this insistence that things that need to be collectively done must be centrally done?

I find this an intensely irritating argument:

Government reaction to the floods in Somerset brings into sharp focus a central conundrum for any rightwing, neoliberal administration. It is the battle of populism versus ideology. An emergency on this scale requires them to behave, quite simply, like socialists. It requires a well co-ordinated, firm, top-down response, and the spending of tax revenue to alleviate misery, on the strict basis of need rather than worthiness.

The irritation comes from the British Left's standard response to anything, which is that whatever it is must be organised centrally.

I think we're all prepared to agree that managing the drainage boards of an area that is below the high tide line is something that is going to have to be done communally. But why on earth must it be done centrally? Under the control of a man whose only formative working experience was as a housing charity worker? What special skills does he bring to the questions of how or not parts of Somerset should be drained? Or, if we're honest, the 11,000 or so people who work for this centralised organisation?

For there is indeed another method of communal action. Local and voluntary action, even local and forced action. Just thinking off the top of my head the people who live in the areas likely to flood might band together (and use the law to make sure there's no free riders) and create, ooooh, I dunno, drainage boards or summat. They all pay in a bit each year, call them just to be ambitious drainage rates, and then those boards can hire a few people to dredge the rivers, man the pumping stations and all that. We might also expect the locals to clear the ditches on their own land, those boards being responsible only for the larger efforts necessary.

And now to the big reveal: this was of course the way that the Somerset Levels were managed for centuries since their first draining and it's only since the service was centralised under the Environment Agency that it's been a complete cock up.

As I say I find this an intensely irritating argument that the British Left keep coming back to again and again. That anything that must be done collectively must also be done centrally, in a "top-down manner". When in fact a very large number of things that do indeed need to be done collectively are better done on a local basis, more bottom up than top down.

You know, by people who might actually know what they're doing? With the added attraction that since they actually live in hte affected areas they might also care about what gets done?

The positive money idea refuses to die

This idea is being given another run around in The G today.

But the 1844 law was never updated to apply to electronic money and still only applies to paper notes. Metal coins and paper notes now make up just 3% of all the money in the UK. The remaining 97% of money consists of essentially numbers in high street banks' computer systems. Banks create this electronic money through a simple accounting process whenever someone takes out a loan.

Yup, same ol' same ol'.

If the Bank of England created all that electronic money instead of the private banking system creating it then we'd be in the clover. And as ever, the idea just doesn't work. Consider just this one point:

Government finances would receive a boost, as the Treasury would earn the profit on creating electronic money, instead of only on the creation of bank notes. The profit on the creation of bank notes has raised £16.7bn for the Treasury over the past decade. But by allowing banks to create electronic money, it has lost hundreds of billions of potential revenue – and taxpayers have ended up making up the difference.

OK, that number for seigniorage is roughly correct on the physical money. But what's wrong with the number for electronic money? Hundreds of billions? Well, the contention is that this value has been created by those private banks: that's how, if the BoE creates it instead then the BoE gets that hundreds of billions in revenue. Excellent: so, if the private banks have been creating all this money then those private banks must have been making those hundreds of billions. Or someone, somewhere, has been.

And the thing is, there just isn't anyone out there who has that hundreds of billions. There just ain't. Therefore, somehow, the creation of that credit (to give it its proper name, not money) doesn't carry a seigniorage profit of hundreds of billions. And thus the BoE cannot appropriate that non-existent seigniorage by doing the credit creation directly.

I agree entirely that it is indeed the banking system (but not an individual bank) that creates credit. But there isn't some hundreds of billions of profit to be made out of doing so: for no one is in fact making that hundreds of billions. Thus it's not possible to the Bank of England to appropriate that hundreds of billions.

It's interesting to note that this idea is backed by Andrew Simms of Not Economics Frankly fame. Sigh.

Interest rates are set in the market place

The London housing market is booming. According to Nationwide, prices rose 14.9% over 2013. According to Halifax, they climbed 9.4%. According to the Land Registry they were up 11.2%. The Office for National Statistics hasn't quite got data for the whole year yet, but their numbers show prices up 11.6% in London in the 12 months to November 2013. No doubt Rightmove, LSL, Hometrack and all of the many other indices echo this finding. While we at the ASI have pointed out how the government has jacked up demand with the Help to Buy scheme (some have quipped it might more accurately be termed "Help to Sell") the Bank of England and Treasury have dialled down the housing element of the Funding for Lending Scheme in response to worries about a bubble and unaffordability.

But however much these schemes are artificially adding to demand, it is certainly clear that London houses—a desirable place for natives and people across the world to live—face a huge demand and are in limited supply. Since this is clear, I have been loath to call the situation a "bubble"—a bubble seems bound to pop, but tight supply and ample demand suggests a situation where prices will remain high (see an excellent post from my colleague Sam for more detail). However, it was recently pointed out to me that since a high fraction of UK mortgages track the Bank of England's base rate, a jump in rates, something we'd expect as soon as UK economic growth is back on track, could make mortgages much less affordable, clamping down on the demand for housing.

This didn't chime with my instincts—it would be extremely costly for lenders to vary mortgage rates with Bank Rate so exactly while giving few benefits to consumers—so I set out to check the Bank of England's data to see if it was in fact the case. What I found was illuminating: despite the prevalence of tracker mortgages the spread between the average rate on both new and existing mortgage loans and Bank Rate varies drastically. For example, it was almost one percentage point in January 2004, fell to 0.5pp by July, rose to around 0.6pp where it stayed until July 2006 when it crashed to nearly zero in a year, before rising to 1pp in October 2008 and then almost 3.5pp in April 2009. Since then it has steadily trended down to around 2.5pp. There are lots of interesting and obvious stories to tell here, hearkening back to my piece about the confusion between interest rates as a stance of monetary policy and interest rates as the actual cost of borrowing firms and consumers face, but what is clear is that tracker mortgages be damned, interest rates are set in the marketplace.

What this means is that the fact the Bank's base rate will almost certainly be hiked in the next couple of years if economic growth continues at its current healthy pace is not a reason to worry that London's housing bubble will pop. Indeed, the only way London house prices are likely to drop from their current stratospheric levels is if we get a good honest bit of planning deregulation. Moving the green belt out just one mile would allow us to build one million houses, after all. And it could add percentage points of pure supply-side driven growth to GDP and living standards.

So here's another lefty myth taking a pummelling

I thought that this was an interesting little snippet of news:

World food prices fell in January to a 19-month low, as costs for everything from sugar to grains slid amid ample global supplies, the United Nations’ Food & Agriculture Organization said. An index of 55 food items dropped to 203.4 points last month from 206.2 in December, the Rome-based FAO wrote in an online report today. The index is down 4.5 percent from a year earlier and is at the lowest level since June 2012.

This is excellent news of course for it means that we're all richer. However, it does rather beat up one of the myths that those on the left have been promulgating over recent years. Here's the absurd grotesques over at the World Development Movement on the subject:

Banks are earning huge profits from betting on food prices in unregulated financial markets. This creates instability and pushes up global food prices, leaving millions going hungry and facing deeper poverty. In January 2014, after four years of our campaign, the EU agreed to introduce new rules to prevent hedge funds and investment banks from driving up food prices.

Do note that those new rules aren't actually in effect yet, let alone resonsible for the falls in food prices.

The WDM's basic claim was that the more speculation there is in futures markets then the higher prices will go. As anyone with any knowledge at all of markets has pointed out, futures markets can only affect spot prices if stocks are rising. When food prices were indeed rising we did see an increase in futures speculation, indeed we did. However, we did not see an increase in stocks: therefore it cannot have been the futures pricing that was driving the spot prices.

We've also not seen a fall in the amount of money being used to speculate in food prices: nor a reduction in the number of trades. But we are indeed seeing food prices fall.

At the end of which there's really nothing left of the case that financial speculation in futures markets increases spot food prices, is there?

No doubt they'll think up some other phantastical claim soon enough though.

Economic freedom makes you fat

A fascinating little finding from the WHO: economic freedom makes you fat:

In line with previous research, our study shows that countries adopting what are considered market-liberal policies experience faster increases in both fast food consumption and mean BMI. These results are in accord with previous research showing that more stringent trade restrictions – including better protection of agricultural producers – the frequency of price controls and stricter government regulations46 are negatively correlated with obesity.

And what are we supposed to make of this? No, it's not because they've included poverty stricken hell holes like Cuba or North Korea. It's OECD countries only they've studied.

Well, what I make of it is that clearly people desire to consume fast food and are happy enough to end up a bit porky as a result. And as that's what people desire to do what damn business is it of anyone else to prevent their doing so?

For look at what it actually is that they're saying. In those places where people are free to open up fast food joints the citizenry appear to like, enjoy even, consuming the produce of those joints. Assume that all of their calculations are indeed correct and that both this is true and also that this leads to lardbucketry. Excellent, since the aim of this whole economics thing is to maximise the possibly utility of the populace then we seem to have found a method of doing so. That is, maximise economic freedom and then let people do as they please.

Which is, of course, what is being done. That people use this freedom in a manner that certain prodnoses don't approve of makes no matter. For the utility we're trying to maximise is that of the populace not the prodnoses.

If a regular hamburger or two makes you happier, despite or because of that extra 20 lbs you carry as a result, great, you're happier and that's the whole point of this economic freedom thing. And as revealed preferences tell us, if people didn't enjoy these sorts of things then their greater economic freedom would not lead to their doing them.

So, all in all we should thank the WHO for revealing this truth to us. In precisely those places where people are able to consume as much fast food as they would like to they do so. Those attempting to stop people exercising their own choices and desires in such a manner are therefore, by definition, illiberals.

What's really wrong with the economy: bureaucracy

Allow me to tell you what's really wrong with the economy these days: it's the bureaucracy, stupid!

Now that little video may well have been made as a jokey ad and there's some doubt as to whether a drone would be able to carry that weight. But ever since that little joke went viral guess what's happened? Yep, the company has been told to shut down the operation:

His drone successfully delivered 10 bottles of beer to a fishing hut on Mille Lacs Lake in Minnesota. However posting a video onto You Tube boasting of his initiative served only to attract the attention of the FAA, which currently bans the use of drones for commercial purposes. It has instructed the brewery to stop its airborne deliveries, to the disappointment of customers who have made a plea for a change of heart on the White House website. Current federal laws limit the use of drones for recreational purposes and they must not fly over populated areas.

Now that there should be some regulation is just fine with me. There has actually already been one death when the rotors of one craft cut the throat of a passer by. But this is what enrages:

The FAA is redrafting the regulations, but the commercial use of drones is unlikely to be allowed in the USA until 2017.

The process started last year: so that will be 4 years just to get those regulations drafted. And really, this just won't do. For economic growth is all about, is based upon, how quickly we can adopt new technologies. It might be to do new things or it might be to do old things in a more interesting or efficient manner, but it really is the adoption of new technology that drives the whole thing forward and thereby makes us all richer. A four year dealy while the bureaucrats scribble on pieces of paper is something we just shouldn't be willing to put up with.

After all, it's not a particularly difficult task, is it? Should we allow drones to slice peoples' heads off? Y/N?

If N are there drone designs without exposed rotors? Given that the answer there is Y the only other question would be what level of insurance should we insist that commercial operators have?

There, that wasn't so difficult to do and if I can do it in five minutes then what on earth is the bureaucracy doing taking four years over it? Waiting for their pensions to mature or something?

And yes, of course this is a fairly trivial example. But what people outside the entrepreneurial world don't seem to understand is that almost every new product and or service is being subjected to the same regulatory delays. And that really is having an effect in slowing down the growth of the economy.

I'm perfectly willing to agree that there are areas of life that do indeed need regulation. But could we please note that we don't need regulation of all aspects of life and further, where we do indeed need it can we get these things settled in a timely and efficient manner? Not doing so is needlesslyh making us all poorer than we need to be.

Let me Google that for you

Google is being targeted by protesters angry about the rapid increase in the cost of living in San Francisco. Their complaint focuses on Google's employee shuttle buses using municipal bus stops, but the real problem seems to be that well-paid Silicon Valley workers have driven rents up in the city. In City AM I argue that this is much more likely to be to do with planning controls restricting the supply of housing, and that government is to blame:

It comes down to supply and demand. As the Cato Institute’s David Boaz has noted, San Francisco’s strict planning laws have made it much more costly to build new housing to meet rising demand. Zoning laws restrict the construction of higher density buildings on the city’s limited land mass. Median rents are now the highest in the US. Over the past ten years, the city’s population has risen by 75,000, yet the number of housing units has increased by just 17,000. Paradoxically, rent controls that apply to some parts of the city are probably making things worse – those who live in rent-controlled housing may be OK, but there is no incentive to build more.

The parallels with London are obvious. Read the whole thing.

Edapt in Education

Michael Gove's battle against  "the blob" rumbles on. Not only is he in the firing line over Ofsted appointments, but the NUT is set to announce the date for more teaching strikes on Friday. Cue the cheers of solidarity from some sources, and lofty dismissals of leftist militarism from others.

Though the saint-sinner dichotomy makes for easy reporting, the real relationship between teachers, politics and the unions is more interesting. Despite falling membership across other sectors, teaching remains a highly unionized profession. Teachers also report high levels of satisfaction with their union experience. Despite this, turnout for voting on industrial action is often low, and 44% teachers told a LKMco study that the right to strike isn't important to them.

Instead, the most frequently-given reason by teachers for union membership is access to legal advice and support. With 1 in 4 teachers experiencing a false allegation at some point in their career, the expertise and advice a union offers in times of dispute is also cited as the most valuable service they provide.

Given the structure of employment law and the difficult nature of dealing with children, it is no wonder that teachers value this support. However, there's no reason why affordable expert advice should have to be bundled with a political agenda. Indeed, a quarter of teachers said that they'd rather not belong to a union if a good alternative existed. At a CMRE seminar last week John Roberts outlined the model of his company Edapt, a for-profit, teaching union alternative established in 2011. Edapt offers the legal advice and representation teachers seek, without engagement in political bargaining and lobbying. Instead of trading blows with governments they can focus on delivering quality employment support to their members. Many members approached Edpat with a pre-existing issue and unsatisfied with their union's response, whilst Roberts boasts of Edapt's 99% satisfaction rate.

Obvioulsly, this model would not be for everyone. Many teachers still consider collective bargaining an essential tool, and Edapt is small fry compared to the unions. Not all teachers are comfortable playing politics, however, and inter-union competition for members can encourage more politically aggressive strategies. Recent strikes have polarised teachers, with Edapt growing most quickly around times of industrial action. Further strike action could lead to another surge of teachers uncomfortable or simply exasperated with their union's actions.

No matter what causes people to join Edapt, political neutrality is crucial for its long-term success. It's ironic that eschewing sector politics can look ideological, but a 'non-union' is easily seen as an 'anti-union'. Gove might have made this mistake himself in inviting Edapt to reform discussions last year. And, tellingly, his endorsement of the Edapt as a ‘wonderful organization’ actively lost them members.

Time will tell just how successful union alternatives can be. If Edapt can prove that it isn't ideologically driven and its focus is right, the model might have relevance in other sectors and across countries. With only 25% UK workforce unionised, there might be scope to offer services to people who wouldn't have considered joining a union. Either way, with 48 hours of tube strikes starting tonight, I bet TfL wishes that there were more union alternatives within public transport.

Just why are we ruled by these people?

The 2020 Conservatives group used Laura Sandys MP to write a report on how we should all reuse stuff much more so that we're a much richer nation. And my question to that group is why?

Why did you have written and then release a report that shows your misunderstandings of how the economy works? Wouldn't it have been better to write one on a subject you do understand?

I managed to get hold of a copy (it's not on the 'net as far as I can see) and it's somewhat painful to read. There's the pretty much standard now view that we're all about to run out of minerals, an obvious fallacy if there ever was one. This leads to the insistence that we must all recycle more and this will make us richer:

The UK spends £1 billion a year in landfill costs just to dispose of plastics, wood, textiles and food - and in the process destroys these valuable commodities41. If a landfill ban was introduced just on these products and materials, £1 billion worth of costs would be avoided and a further “£2.5 billion [of] value” would be recovered42

Those two references, 41 and 42, are to something from the Green Alliance....where Mariana Mazzucato is a trustee which isn't all that comforting. But the obvious point here isn't tackled: if all this value is currently being dumped into holes in the ground why isn't anyone trying to make money out of it? We've been running scrap and rag and bone operations for many centuries in this country already and if there really was £3.5 billion of free money available then someone would be doing it and providing themselves with hot and cold running Bentleys.

That they're not shows that there's something wrong with this basic calculation: sure, landfill might cost £1 billion (much of that being the Landfill Tax) and OK, I'm willing to believe that the materials, when processed, could be worth £2.5 billion. But the reason it's not being done is obviously that the process of not landfilling the materials and processing them instead costs more than £3.5 billion. There's also an estimate that such recycling would lead to 300,000 new jobs. Given that the pay cannot be greater than the value being created that would imply wages of £12,000 for each of them even if we believe their number for said value created. We're really going to make the country richer by creating jobs at about half of median wage? It seems unlikely, doesn't it?

But there's a part that provides me with little hope:

For those of us who come from a business background, it is always surprising that government rarely considers the profitability of the UK economy. Currently the vast majority of political discourse and macroeconomic analysis centres on GDP, but a business would never focus on the top line and ignore the bottom line – businesses focus on profit rather than turnover for good reason. In the commercial world and across the economy ‘margin’ and ‘profitability’ are given equal consideration to ‘sales’, yet this is not reflected in public policy discourse.

As UK policymakers do not currently focus on profitability, there are few policies in place that truly support margin enhancement. This is illustrated by the fact that there is no mention of the words ‘profit’ or ‘profitability’ in BIS’ Business Plan4.

I had hoped that this was simply clumsy phrasing but the same point is made in interviews about this plan:

The modernisers also call for a rethink away from what Sandys calls the "British Leyland" mentality, which says that the strength of an economy is measured solely by Gross Domestic Product (GDP) – the size of an economy. "We are going to have to look at what we are really achieving and not what I call British Leyland metrics," Sandys said. "British Leyland produced a lot of cars. It had a lot of GDP. Nobody wanted the cars but nobody seemed to care.

Oh dear. Ms. Sandys seems to believe that GDP measures the turnover in the economy. Erm, no: it measures the value added in the economy. The clearest expression of this is when we look at it from the income approach: what everybody earns, wages, salaries and profits, equals (with a couple of minor adjustments) GDP. It simply is not true to say that GDP is composed of, nor measured by, the turnover of companies. BL's contribution to GDP was the wages it paid to its workers minus the losses that it made: something which could conceivably have meant that BL actually reduced GDP given the scale of its losses at times.

Now I'm perfectly happy for people to come up with proposals to make things work a little better. But I would hope that those doing so demonstrate that they understand how things currently do work. And equating turnover to GDP is a signal that they very much don't here.

And then there's the part that near kills all hope:

Why do we only think of labour productivity?

For the obvious reason that labour productivity is what determines what it is possible to pay labour. And our aim in this whole economy thing is to maximise the living standards of the people which is why we concentrate on raising labour productivity so that people can earn more and thus have more nice things.

Please note that this isn't an ideological or political assault here. It's a commentary on the point that the people presuming to tell us how the country should be run don't have a firm grasp on that real world they want to direct. Which isn't likely to lead to a decent outcome really.