Economic Nonsense: 11. Inflation is a price worth paying to boost employment
It used to be thought there was a trade-off between inflation and employment. The economist William Phillips published a 1958 paper in which he found an inverse relationship between money wage changes and unemployment over nearly a century. The relationship was called the Phillips Curve, and was used by legislators to stimulate the economy by inflation to boost employment rates. Unfortunately the Phillips Curve went vertical in the 1970s as countries were beset by high inflation and high unemployment occurring simultaneously. People were building expectation of inflation into their calculations and their economic decisions. Inflation rewards debtors at the expense of creditors and makes people less ready to lend. Investment in productive activity diminishes.
No less seriously, the assumption of future inflation makes forward planning difficult. People do not know what money will be worth by the time their goods reach the market. What inflation does do is cause misallocation of resources. People see the new money created by government and make false assumptions about what they should invest in. When they find that the demand was unreal, goods go unsold and there is an economic downturn with increased unemployment. This brings about the 'stagflation,' in which high inflation and high unemployment happen together.
Inflation can reduce unemployment in the very short term, but only at the expense of more unemployment following afterwards. This is why some governments have boosted inflation in an election year to take advantage of the apparent stimulus, then face the recessionary consequences after the election is safely out of the way. The strategy is now called boom and bust because an inflationary boom is followed by a real-world bust.
Logical Fallacies: 12. Abusive analogy
https://www.youtube.com/watch?v=hHUVzpbgkB4
Madsen's latest video on logical fallacies examines the 'abusive analogy'.
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Democracy is the concept that the people should get what they want
Good and hard, as Mencken put it. But even so some of the things that people want surprise. As in this Owen Jones piece:
According to the opinion polls, most Britons want public ownership of rail and energy, higher taxes on the rich and a statutory living wage.
A statutory living wage?
The poll of 1004 employed people shows that 71% of Labour voters, 66% of Lib Dems and even 44% of Tories (60% overall) say we should increase the Minimum Wage to a Living Wage – and that the government should make the Living Wage the legal minimum. There is majority support for such a move across all regions of the country and all social class groups. Interestingly, the group who most agree that a Living Wage is needed (even if it costs jobs) are the D/E social class group – working class voters who are more likely to be paid the minimum wage, and know how hard it is to live on the poverty line.
The argument against the Living Wage becoming the legal floor is that it would cost jobs – which is exactly what was said about the Minimum Wage, and it didn’t happen then. However even if that is the case, the public still think poverty wages are something that should be a thing of the past.
The problem with this is that the pe4ople don't know the truth about that living wage. That it is a pre-tax number. They also don't know that if we did not charge income tax and national insurance to those low wages (as we have repeatedly argued that we should not) then the current minimum wage would provide a higher post-tax income than the proposed living wage would with the current tax system. They don't know this because the current agitators for the living wage don't tell them.
And the reaction really will be different if the question is properly couched. For example, would you support the ending of tax poverty? would be an interesting formulation.
For that's actually what we've got, not low wage poverty but tax poverty.
Polly Toynbee explains why the NHS should be privatised
Not, admittedly, what we would expect to hear from Polly but the case she makes for the privatisation of the NHS is logically perfect:
Ration life! Limit the value of a good year of human life to £13,000 to spend on any one drug, says a report from Prof Karl Claxton of York University. Spend more, and other patients die for lack of funds.
That’s the crunch point in NHS funding, according to health economists at York University, inventors of the original notion of measuring health spending by Qaly – a quality adjusted life year. If all health spending was put through this rigorous analysis of ensuring every pound bought the best value, there would be a remarkable shift in NHS priorities. Mental health would score highest, not lowest, in spending, as each pound can buy the most effective diminution of intense suffering. Suicides are rising, most among young men in deprived areas – deaths that could be preventable at reasonably low cost. Instead, a minor operation may take priority, as headline waiting time targets matter more politically.
During a period of the steepest cuts per capita the NHS has ever known, the government has weakened attempts to ration rationally.
Politics, being politics, means that the NHS is being run irrationally. The solution is therefore to remove the NHS from being run by politics. That part of national life which is not run by politics is known as "the private sector".
Thus the NHS should be privatised. QED.
And do remember, it's not us telling you this, that's Polly Toynbee saying it.
We do sometimes wonder about the boffins
One of the endearing things about the very British idea of a boffin is that they are assumed to be entirely indifferent to the real world. What matters is the theoretical world going on inside their heads, not the more mundane one in which we all pass our lives. This does, of course, lead to some hilarity when that theory is applied to said real world. Perhaps our favourite example of this was when the new economics foundation decided to take their principles of what constituted the good life and rank countries so as to decide upon where was the very bestest place to live. Their answer was Vanuatu (subsequent versions of the report changed the ranking method so as to produce a less embarrassing result). The best society on the planet was one of Stone Age tribesmen, wearing penis sheaths, who worship the Duke of Edinburgh as a Living God. This rather startling result does of course tell us a great deal about the theories the nef uses to evaluate the world.
We've a close contender for this in The Lancet Global Health:
Belgians are known for their chocolate and waffles, while Hungarians are famous for their rich goulash.
But now, a global study has revealed they are among the nations with the worst diets in the world.
Meanwhile, Chad and Sierra Leone, in Africa, have the best diets, consuming the most fruit, vegetables, nuts and wholegrains.
It will be interesting to see what "best diet" here means.
As part of the study, a team of international researchers analysed data on the consumption of 17 key food items and nutrients related to obesity and major diseases like heart disease, stroke, type 2 diabetes, and diet-related cancers.
They looked at the changes in diets between 1990 and 2010 in countries around the world.
They looked at three different diet patterns and gave each a score.
The first was based on 10 healthy food items: fruit, vegetables, beans and legumes, nuts and seeds, whole grains, milk, total polyunsaturated fatty acids, fish, omega-3s, and dietary fibre.
The second was an unfavourable diet based on seven unhealthy items: unprocessed meats, processed meats, sugar-sweetened drinks, saturated fat, trans fat, dietary cholesterol, and salt.
The third was an overall diet pattern based on all 17 food groups.
Hmm. So, by this ranking system the top five countries, the countries with the "best" diets are Chad, Sierra Leone, Mali, Gambia and Uganda. And the five with the "worst" diets are Armenia, Hungary, Belgium, Czech Republic and Kazakhstan.
Average lifespans in our best diet countries are, respectively, 51, 46, 51, 59, 56. For the worst diets, 74, 75, 81, 78, 68.
Meaning that whatever criteria our boffins are using for best and worst diet it seems to be an entirely theoretical one, existing in their heads not this reality we inhabit. For at the very least there's not even a correlation between their idea of better diet and longer lifespan. Which, we would all rather assume, would be a useful definition of "better" in relation to diet, no?
We are reminded of the New Yorker cartoon with one caveman saying to another: "If all our food is free range and organic then why are we all dead by 30?"
Economic Nonsense: 10. Government spends more efficiently than private individuals
This is not only untrue; it is laughably untrue. Sometimes supporters of big government spending claim that government is more efficient because it doesn't need to make profits. Sometimes they say it doesn't need to spend on advertising. Sometimes they say it can borrow more cheaply than private businesses because it has taxpayer backing. The facts show that even with profits, advertising and higher borrowing costs, the private sector is vastly more efficient. The UK's nationalized industries were ailing giants that gobbled subsidies when they were state-owned. When they were privatized they became profitable private companies that paid taxes instead of collecting subsidies. Private investors are more careful because it is their own money at risk. The public sector corresponds to the fourth quarter of Milton Friedman's quadrant: they spend other people's money on somebody else. The private sector is competitive; it has to attract funds competitively. It has to anticipate future demand to avoid investing unproductively. Private projects seek ways to curb costs, to employ people efficiently, and to keep as close as they can to a timetable.
Public projects are notorious for cost overruns, for over-manning, and for being completed years behind schedule. Private projects are undertaken in response to market signals; they are subject to commercial pressures. The aim is to produce items that will meet future demand and generate profits. Public projects, by contrast, are subject to political pressures. They are often undertaken with a view to electoral popularity. The projects chosen, their scope and their location are often undertaken to secure the backing of various interest groups and localities, in the hope that this will translate into electoral support. None of this makes for efficient spending by governments.
The Lord's Digital Agenda
On Tuesday the House of Lords Select Committee on Digital Skills released the 144-page report ‘Make or Break: The UK’s Digital Future’. It’s a typical government report, calling for ‘immediate and extensive action’ in something or other — and in this case, unifying government's current, disjointed digital initiatives with the launch of a grand ‘Digital Agenda’. (This masterplan includes such fabulous ideas as the middle-aged men in central government ‘future-proofing our young people’ through things like bolting-on a digital element to all apprenticeship schemes.) One of the report’s most newsworthy findings was London’s poor broadband speed, comparative to other European capitals. In a ranking of their average download speed London came 26th — nestled between Warsaw & Minsk —whilst the likes of Bucharest, Paris and Stockholm topped the chart. London also came 38th in a rating of the UK's cities’ speeds (although it's worth noting that Bolton, the UK’s fastest city, would make the European capital ranking’s Top 10). The Lord's report is also concerned with the persistence of internet ‘not spots’ in urban areas, universal internet coverage and the rollout of superfast broadband. In response, it calls on the government to classify the internet as a utility service, with the desirable goal of universal online access.
It goes without saying how vital digital connectivity is to the modern economy, as well as the importance of staying internationally competitive. However, a new, centrally-dictated ‘Digital Agenda’ is probably quite an ineffectual and expensive way of boosting the digital economy.
Despite the House of Lords' fears about the speed of superfast broadband rollout, coverage has increased from 55-60% of the UK in 2013, to 70-75% in 2014. And, whilst the report holds up Cape Town as an example of a city providing universal broadband, this won’t be ready until 2030. In the time it takes for the state to roll out the chosen digital infrastructure, it may already be out of date. Whilst many are still choosing between regular or fibre optic broadband, landline-free 4G home broadband is the latest offering to hit London. At the same time, eyes are already on 5G, and the new capabilities it can bring.
Treating the internet as a public utility is also problematic from a free-market standpoint. Doing so could, for example, lead to calls for more government involvement in the deployment and update of internet infrastructure. However, a study by the Mercatus Centre looked at American municipal government investment in broadband networks across 80 cities, and found that for the billions of dollars of public money spent, there was little community or economic benefit.
It’s also the type of thinking which has led to America's ‘Net Neutrality’ debate, where, on the behest of Obama, the Federal Communications Commission has proposed to regulate internet service providers as 'common carriers', and in doing so, subject the net to a 20th century public utility law originally devised to deal with the telephone monopoly. Ostensibly designed to protect consumers from the creation of ‘anti-competitive’ internet fast lanes for big content producers, Net Neutrality legislation threatens not only the speed, price and quality of internet provision, but the autonomy of ISPs and investment at the core of the net.
Whilst the Lord's proposed 'Digital Agenda' might seem far-removed from such heavy-handed state activity, a government who considers it their duty to take online and 'digitally educate' every single citizen risks heading down an increasingly interventionist and expensive path.
Remarkable what you can learn from bishops these days
The Anglican bishops have decided to tell us all something about how to achieve the good life. Amazing what you can learn from bishops these days really:
Adam Smith, the father of market economics, understood that, without a degree of shared morality which it neither creates nor sustains, the market is not protected against its in-built tendency to generate cartels and monopolies which undermine the principles of the market itself.
No, not really. Smith thought the market would do just fine. But that there will always be attempts to use the law and regulation in order to privilege certain producers into those cartels and monopolies. It was actually Karl Marx who insisted that markets inevitably led to monopolies, Smith who pointed out that not messing with markets with regulation was an aid to preventing monopolies.
But we are also a society of strangers in a more worrying sense. Consumption, rather than production, has come to define us, and individualism has tended to estrange people from one another. So has an excessive emphasis on competition regarded as a sort of social Darwinism. (This is a perverse consequence of allowing market rhetoric to creep into social policy. For an economist, competition is not the opposite of cooperation but of monopoly).
Yet that is extremely perceptive. We might go further (as we do) and argue that competition is actually how you decide to cooperate with, the first being the precursor to the second. The supplier to the steel mill is, after all, cooperating with the steel mill in being a supplier.
One important principle here is the idea of subsidiarity – the principle that decisions should be devolved to the lowest level consistent with effectiveness. Subsidiarity derives from Catholic social teaching, and it is a good principle for challenging the accumulation of power in fewer and fewer hands. It does not mean that everything must be devolved to the most local level. Nor is it about handing small matters downward whilst retaining all meaningful authority in the hands of the powerful.
We would most certainly support that. We might insist that rather more things can and should be done at rather lower levels than some others but we're absolutely fine with the general principle.
As an example, “post code lottery” has become a term of disparagement for local variations in public services. But that implies that a single standard, determined and enforced nationally, is the only way to order every aspect of public life. It is certainly true that many services should be available as equally as possible to every citizen. But it is also true that different communities have different needs and may choose different priorities. If people feel part of the decision-making processes that affect their lives, there is no reason why, in many aspects of social policy, local diversity should not flourish.
Quite, who wants a monolithic drabness to the nation?
The desire for neatness, as much as the desire for control, is characteristic of how politicians tend to think – especially those in government or contemplating office. They are often backed up by bureaucracies which are allergic to messiness. But human life and creativity are inherently messy and rebel against the uniformity that accompanies systemic constraints and universal solutions.
By now we're rather wondering whether there hasn't been a revolution in the Anglican Church. Perhaps an influx of Austrians?
Whether on the political right or the political left, it is a long time since there has been a coherent policy programme which made a virtue of dispersing power and control as widely across the population as possible.
We have been chanting that lonely hymn for some time now.....
This document is much more interesting than the predictable ways that the various newspapers have been covering it. interesting in the sense of being something of a curate's egg: parts of it are excellent.
Economic Nonsense: 9. International agreement on tax rates would benefit everyone
International agreement on tax rates would hurt everyone except those who collect and spend taxes. Governments have little restraint on the degree to which they can take the money earned by their citizens and spend it on overblown projects designed ultimately to buy votes and secure their re-election. They meet some resistance as they increase their tax take, but people can do little except grumble. Very often there is little difference between the major political parties, or between the tax rates they levy while in office, so democratic restraints are minimal. The one effective restraint is the ability of people to move to another jurisdiction. This is especially true of modern economies which place considerable value on the talents of high-achieving individuals. Government is restrained on what it can tax them by their ability to move. When faced with punitive tax rates, they can relocate to somewhere more favourable. High earners in France, and those with aspirations to become so, began to leave the country in significant numbers when faced by government plans to levy a top income tax rate of 75%. Similar effects have been observed elsewhere.
What is true of individuals can be true of companies. They, too, can choose to relocate to areas where tax rates are friendlier. The Republic of Ireland found its low 12.5% rate of corporation tax attracted companies to base themselves within its borders. High rates of corporation tax elsewhere added to Ireland's attraction.
Those who support high taxes dislike this restraint and many of them call for international harmonization of tax rates. The aim of this is to make it pointless to relocate, and to remove the one curb on over-large and over-costly governments. They dislike what they call 'tax competition.' But relatively low taxes on high earners and business constitute a business-friendly environment and are conducive to economic growth. Those who call for harmonization are in effect saying they do not want any countries to be more business-friendly than others. Denied an escape to less oppressive tax regimes, people become the helpless prisoners of rapacious governments.
Logical Fallacies: 11. False precision
https://www.youtube.com/watch?v=Hj5VcIASCDQ
The latest in Madsen Pirie's series on logical fallacies: 'False precision'.
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