Jamie Oliver is wrong in theory here, not just in fact
While banging the drum for his illiberal and unnecessary sugar tax, Jamie Oliver told Parliament the following:
The tax, he said, would “remind [manufacturers] who is boss. And that is child health and the government.
“We should work out who is running the country. Is it businesses – who are profiting from ill health in our country – or is it us?”
More important than the tax itself, he said, would be the message it sent that the government “is willing to fight tooth and nail for public health, and especially children’s health”.
The tax system is not a communication method. We can send messages by fax, letter, email, telephone call and there might even be the occasional telex left lying around. But tax is not a messaging system so that's not the way we send messages.
Secondly, the only people who profit from ill health in the UK are those people working in the NHS who get paid to deal with it.
But over and above all of this is the entirely mistaken theoretical view he has of the place of government. They do not, and we do not want them to, run the country. This has actually been tried of course. There have been governments which tried to determine who produced what, at what price, and then who was able to consume them and in what volume. We usually refer to such failures as Soviet style socialism. It just didn't work: neither in restricting access to the goods that were considered verboeten (for example, Gorbachev's restrictions on alcohol led to hte entire country running out of sugar as bathtub vodka was made) nor in any other conceivable measure of the Good Life.
What we do want government to do is those things which both must be done and which can only be done by government. Given that we're all entirely capable of determining whether we'd like a nice glass of fizzy pop or not, this isn't an area where we need the government's help. Thus the proposition fails, on both theoretical and empirical grounds.
Why is Mr Osborne going to wreck the best bus industry in Europe?
In London, Belfast and most European cities, buses are regulated and run by local authorities usually through a contracting model. They require very substantial public subsidy. Outside London, mainland UK buses are deregulated with private bus companies making all the decisions about when and where buses will run and what fares will be charged. They take the commercial risk. Because London has a highly developed bus lane network combined with a congestion charge, along with high population density and a growing economy, bus use has grown considerably in recent years. Despite this high use, the regulated system is so bureaucratic that London buses need a subsidy of about £600m per year. Belfast buses make large losses, but as they do not have London funding levels, they are facing big services cuts.
Outside London 90% of buses do not require any subsidy, the rest are mostly deep rural services and a few evening and Sunday services. Where local authorities are very pro-bus, usually to protect their town and city centres from congestion and pollution, or because it is impossible to provide a bigger road network, bus use is growing and companies are providing more comfortable buses with free Wi-Fi.
Places like Nottingham, Reading, Brighton, Oxford and Edinburgh have very high and growing levels of bus use. Customer satisfaction is high. Buses carry about four times as many passengers as the rail network and have the same levels of safety.
Despite the evidence, some of our bright local authority transport officers have decided that the buses are popular in London because they are regulated rather than because of the basic economic and financial situation there. For years these officers have been trying to get buses re-regulated and pass into local authority control. They have persuaded themselves, again against the evidence, that the huge costs of contracting could be met by cutting the profits of bus companies.
The outcome would be huge losses for the local authority, which would be passed on to council tax and business rate payers, along with big cuts to the bus network. Recently Sheffield City Council which had been a bellwether for regulation, changed its mind and signed up to a partnership arrangement with the bus companies. This will cost them very little, but they already have higher bus use and less congestion and better bus services for Sheffield are being delivered.
The puzzle is that in the name of devolution Mr Osborne is unnecessarily giving local authorities contracting powers (being described as franchising – but it isn’t in reality!) with a Buses Bill due to go through Parliament early next year.
A few dinosaur led local authorities such as West Yorkshire and Tyne and Wear are likely to rush into contracting, destabilising city budgets and undoing some of Mr Osborne’s attempts and deficit reduction. If they succeed there will be knock on effects for all Britain’s bus networks, even the best, because companies will no longer be able to raise capital for new buses from the private sector and quite quickly buses will become old and unreliable. Mr Osborne will have ruined one of the Conservative Party’s best privatisations!
Once more on trade and the EU
As Caparo Steel crumbles into the dust we've got the usual appearance of someone arguing for state aid. We don't, we're afraid, accept this argument:
Our steel industry today is in exactly the same position. China’s state-owned enterprises are not just selling steel below the cost of production in the UK. They are selling below the cost of production in China. This is not a fair fight to discover who is the most efficient producer of steel. It is a geo-political strategy for economic domination. As soon as Britain’s steel industry has disappeared, the price will go back up again and major steel consumers like the construction industry and car manufacturers will have no escape from higher international prices.
There's very little evidence that this has ever been a successful strategy for anyone. For no one can ever find a case where the newly victorious survivors of the price war have been able to raise prices enough to make up for their losses in the price war. Such attacks just don't work as an economic strategy: as the results of the Chinese rare earths war show. Once China thought it had an uncontestable monopoly, in 2010, it raised prices significantly. This called forth some 400 companies (at one count at one time) to contest that monopoly and now prices are, only 5 years later, well below what they were in 2010.
Further, even if it is true that prices will rise in the future, it makes absolutely no difference at all whether some of the surviving factories are in the UK. Because the basic problem is that there's more steel plants, making more steel, than anyone wants to use at profitable prices. Therefore some of those plants must close. Offering state aid to certain plants makes no difference at all to that calculus. When the requisite number of plants have closed, whether those closing be in China or the UK, then that steel price will rise again and all will be paying that international price. And all will be paying that international price whether some of the survivors are in the UK or not.
Thus, state aid makes no difference at all to the future price of steel to UK manufacturers. It's just a cost to us taxpayers: a cost that we shouldn't have to bear.
There's also this remarkable lack of knowledge about the situation at hand:
Second, the Government has failed to make full use of the powers granted by the World Trade Organisation (WTO) to prevent nations from undermining economic competition. Selling below the cost of production (called dumping in trade jargon) is against WTO rules. The EU accepts that Chinese steel is being dumped and restrictions have been accepted, but nowhere near enough. Perhaps our government thinks that pursuing claims under the WTO rules is abandoning free-market principles. Far from it; enforcing the rules is upholding free enterprise.
The UK doesn't get to talk to the WTO. Extra-EU trade is a sole competence of the EU.
The Coils of HMRC
To portray the same agony, a modern sculptor would depict Laocoön wrapped in the coils of the tax man. There is no escape. HMRC does not do email. Letters go unanswered for months and one has to wait 45 minutes on the phone before being cut off. The harassed foot soldiers who deal with us are not to blame: their generals creating these labyrinthine coils are. In a May 2010 speech to the CBI, the Chancellor promised radical tax simplification, saying “The tax system has become hugely complex over the last thirteen years. Since 1997, the tax legislation handbook has more than doubled in length. It is now over 11,000 pages long.”
One can question whether the length of the handbook, or the size of annual Finance Acts, accurately depicts tax complexity but there is no question that both have grown hugely since the 1980s and the Chancellors are mostly to blame. Tolley’s Annual Tax Guide, at nearly 900 pages, has grown rather than shrunk under this Chancellor’s regime. Up to 1992, Finance Acts averaged below 200 pages. They then doubled in length. But rather than exercise any restraint, Osborne’s record is even worse: 668 pages in 2014. 2015 was curtailed for the election but he still produced 352 in March and a further 210 pages in July.
The Office for Tax Simplification was set up in 2010 and is now being made permanent. It has published over 30 reports and made 402 recommendations, starting with abolishing 43 tax reliefs – nice for the Treasury, not so nice for those losing out. But these are tinkering round the edges.
Rather like the government seeking to engage in more wars with fewer soldiers, the Chancellor has simultaneously cut personnel numbers in HMRC – hence the lousy taxpayer service.
To give, briefly, a worm’s eye view, the forms they sent were completed and returned in early August. Just before the 31st October cut-off, they were sent back on the grounds of being the wrong forms. No mention of what the right forms might be. Several hours of holding my phone next to my ear later, I was informed as to the correct forms. The file note on that had not been passed on.
Apparently, if the 31st October deadline was now missed, I would be fined as the original submission “did not count”. Not to worry: I would win my appeal but I had to be fined first in order to appeal.
The new forms, far more complex than the old, appear to have arisen from HMRC’s new but heavy-handed anti-anti-avoidance rituals. They have no sense of proportion: my few quid does not need pages and pages of questions. I can prove my income, where it came from and that one piece of paper would have all the information needed to compute my tax. The point of the 31st October deadline is that the computation is their job, not mine. If we were talking large sums, it might another matter.
The same civil service mentality applies money laundering legislation to this village church’s flower fund. Coils within coils.
Please, George Osborne, give us the radical tax simplification you promised.
Yes, we like this idea from Liam Fox
An interesting idea. For we do indeed know that there're problems with using GDP as the sole guide to how the economy is doing. It doesn't measure distribution for example, counts cleaning up pollution as positive (which it is) but not the original pollution as negative and so on. It also suffers from a grave problem in the way that it measures government activity. It's this which Fox thinks we should address:
We have long been fixated on the concept of GDP growth as the determinant of economic wellbeing, particularly in the political arena. Yet, there is a difference between GDP and wealth creation and it is the latter that ultimately determines our national prosperity. We create wealth when we turn an individual’s idea into a good or a service for someone else to buy. Consider the Keynesian idea of burying £5 notes in bottles in mineshafts and having the private sector dig them up, or Krugman’s proposal to stage a fake alien invasion to boost anti-alien defence spending. Both would boost GDP, but neither would add to worthwhile economic activity. There are better ways to measure whether policies are conducive to wealth creation. If we take total government expenditure out of GDP calculations, then the resulting measure, Gross Private Product (GPP), gives us a much better idea of worthwhile economic activity.
We would most certainly agree that GPP is a useful figure for us to be looking at.
For there's more to it than just some ideas and plans of government not being very sensible, even if they do push the GDP numbers up. We have a basic problem about how to include government in GDP. Which is that we measure GDP at market prices: but there's no market prices for much of what government provides. Thus we have to fall back on simply arguing that the value of what government provides is the amount of money that government spends on that provision. Yes, even we think that a criminal justice system is a good thing to have, adds greatly to the general wealth. Government spending on diversity advisers possibly loss so.
One implication of this is that if we decide to pay civil servants more then the economy grows. Because we are counting the output of the civil servants as being the same as the input we pay them to provide it. So, we do indeed need to change how we view at least some parts of the GDP figures, and looking to GPP seems like a good idea to us.
Stripped, of course, of all that chest beating about it being only the Tories what done it.
Protecting home industry is not a steel
The amount we've heard from politicians and social commentators this week on how unfortunate the UK steel industry job losses are only goes to show how many people are still unapprised of even the basics of economics. Yes it's true, because China can produce and sell steel so much more cheaply than us, it will have a negative effect on our steel industry. But overall that's a good thing - short of wanting buyers to pay inflated prices for UK steel rather than more competitive prices for Chinese steel - which, frankly, only the most narrow Anglo-centric person could desire - it has to be realised that this is just the market's way of signalling that UK steel production is now less efficient than production in other countries, and that the people in the UK steel industry either need to be more competitive or look to do something else. But even if you can't make that argument fly - and goodness only knows why you couldn't - here's something else you should know: artificially protecting UK industries to stave off foreign competition hurts other UK industries in the process. This was the wisdom of international trade laid down most famously by David Ricardo. Let me illustrate how impeding the process of free international trade actually harms the people the government wants to protect – its own industry (and thus, its own citizens).
Let’s suppose there is a car factory in Newcastle that isn’t doing as well as the executives or the government would like, due to consumers’ preference for cars in Japan. The government introduces a policy that favours car production in Newcastle over car imports from Japan. How on Earth could that not be good for the British economy – Britain’s gain is Japan’s loss, right? Wrong. Quite simply, what you put into the pockets of the car factory in Newcastle you take out of someone else’s pockets elsewhere in Britain (as well as having people probably paying more for their cars). Consider Slough’s boiler factory; what you don’t see is an almost invisible chain of events; the boilers made in Slough are shipped off to Japan and sold to a company that makes its money producing nuclear reactors, the buyers of which are companies who trade in mineral oils, and those companies deal with companies who make cars in Japan and ship them to Britain.
In other words, there is a complex economic process that is going on outside of your peripheral vision, whereby both the car factory in Newcastle and the boiler factory in Slough are both bringing cars into Britain. That is to say, if you protect the car factory in Newcastle from competition you must damage Slough’s boiler factory because somewhere down the line they are the competition.
The Newcastle car illustration is precisely how the argument should be applied to steel in Scunthorpe and Lanarkshire. So the next time you hear a politician announcing how much he or she wants to do to protect British producers in one industry from foreign competition, be aware that he or she is unknowingly proposing an action that hurts other industries in Britain, and amounts to a net loss in economic efficiency.
Liam Fox is on the wrong road to sensible money
Shockingly, I find myself agreeing more with the most recent output from firebrand communist John McDonnell than committed free marketeer Liam Fox. In an FT article, McDonnell clarifies his views on the Bank of England: calling Bank independence "sacrosanct" (in contrast to his earlier utterances); arguing for QE to include purchases not just of gilts but a wider range of private assets; arguing for a higher inflation target to avoid the Zero Lower Bound (ZLB) problem; reaffirming the case for 'people's QE'; and considering nominal GDP targeting.
Let me say that people's QE has been tried, and it failed utterly. This shouldn't be surprising. Markets are better at investing than government bureaucrats, whether by 'investing' we mean 'buying financial instruments' or 'investing in physical and human capital'.
We don't need a higher inflation target to beat the ZLB on nominal interest rates because the central bank has tools other than interest rate manipulation (which I've argued it should get out of entirely).
We don't need to buy a range of assets because portfolio balancing works just fine—again, let the market choose where to put newly-created money, at least until we run out of gilts—then buy foreign currency, not any particular asset.
But I think nominal GDP targeting is a very interesting idea, at least if you target levels, especially market forecasts of levels, and especially if you reduce the discretion the rate-setting monetary policy committee has in reaching it. It is as close as you can get to a neutral monetary policy while you still have a central bank, and mimicks what you'd see with a free banking system.
By contrast I think that Liam Fox's speech to the Institute of Economic Affairs labours under a huge number of misapprehensions and offers few interesting steps forward for monetary policy.
Among Fox's claims that don't add up:
- That higher inflation leads to lower real pay—false. This is obviously true for a given level of nominal pay, but nominal pay is not fixed any more than any other price is, so if price inflation rises, wage inflation does too. Real wages move towards real productivity—both logically (otherwise firms could poach each others' workers and make easy profits), and in the data.
- That higher inflation hurts savers or investors—again false. While there may be nominal rigidities in labour markets ("sticky wages") there are few in capital markets. Fund managers and banks are not fooled by nominal values—they move their money around to get real returns. Thus we get the Fisher Equation—extra inflation is simply added to savers' and investors' returns.
- "Central banks have been the government's lender of first resort"—this is simply not true, central banks buy bonds on the after market at the market rate, not from government directly. What's more, central banks don't hold particular high shares of the stock of government debt right now—there is a lot more out there to hold.
- More government scrutiny should be applied to central bank actions—does Fox really have faith in committees, the executive, or worse, elected representatives, to do better? The suggestion is essentially to politicise monetary policy.
- QE only boosts asset prices—false.
- It's bad if QE (considered alone) led to wider wealth inequality—a strange view to take.
- That low real interest rates have anything to do with central bank policy—Fox might want to take a look at the trend of risk-free rates over time and across the world. He might also want to look what happens to market rates (i.e. the rates at which 99.9% of capital is lent at) when central banks loosen policy.
What's shocking about all this is that Fox and I share a huge range of views, whereas McDonnell and I agree on almost nothing.
Fox and I are both free marketeers who want a stable macro policy that leaves markets and the price system as free as possible to determine the important micro goings-on in the economy. Fox points to Friedrich Hayek for inspiration, but I think Hayek's views would be closer to mine, as would those of Milton Friedman. This is not to say that others wouldn't share Fox's perspective—Murray Rothbard and Ludwig von Mises come to mind—but I hope he will consider my alternative free market view.
On those new UN development goals
We're having a slightly hard time getting our collective head around the Millennium Development Goals and their successors, the SDGs. For we're seeing people like David Rieff making what to us are the strangest arguments. To go back a bit, the MDGs were the idea that we could make the world a nicer place by getting a bit more development going on. More children vaccinated, shrink the number of people in poverty, spend a bit more in development aid to make that happen, things like that. And off everyone went and things have been pretty good really. Sure, not all of the targets were met, some of them (notably the poverty one) were met early and surpassed. The world is indeed a better place.
And the SPGs are an attempt to take this further.
And yet here's Rieff's argument, and we've seen it elsewhere. The MDGs were not achieved because one of them, the idea that every country should spend 0.7% of GDP on overseas official development aid, was nowhere near met. He's quite happy to agree that the poverty target was met, the vaccination one pretty close and so on. But there's that great gaping flaw in that the spending target wasn't reached.
And yet the true meaning of this story is that if we've reached all of the other goals, or near enough, without the spending, then it's not the spending that is an important goal, is it? And thus it doesn't matter whether that target is met nor whether we have a similar target for the future.
What we've actually proven is the counterparty to Angus Deaton's observations about development aid. He thinks that such aid can delay development but allowing government not to do the few things that government must do. And here we've found that development can happen without that development aid. Thus, perhaps, we can forget about eh development aid and just carry on with what we know works?
You know, Madsen Pirie's insistence that the way that you beat poverty is by buying things made by poor people in poor countries?
A blow to the Nanny State
It's all about the UK government's drive to get us all saving for retirement. A good start, they figured, would be to make employers set up pension schemes, so employees at least had a plan to pay in to. Workplace pensions used to be hugely successful – with the UK boasting more private pension savings than the rest of Europe put together – until Chancellor Gordon Brown killed it with stealth taxes and regulations.
So it seemed like a good idea at the time. Unfortunately, it's based on an outdated concept of 'employment' – a hangover from the mass-production age. People still think of employers as factory owners employing hundreds of people. But today's businesses are smaller, less structured, and less permanent: they are not based on fixed capital, but on mobile talent.
Gone are the days of entering the factory at 16 and retiring from the same place, with a cheap watch, at 65. People shift jobs much more, drift from employment to self-employment to entrepreneurship and back again, and work in different sectors through their lives. For many, their retirement nest egg is not their pension but their home, their investments, their business: forcing them to contribute to an outdated pension concept leaves them less able to invest in these other ways.
And Treasury rule-makers kill any good idea. They are petrified of losing revenue because of the tax breaks on pensions. And they like things neat. So now, even if you are only employing someone part time – and not necessarily as an employee for your business, but as a home help, say, or gardener or indeed nanny – you have to register the fact. And that's true even if the person is part time and you are not paying them enough to oblige you to pay into their pension plan anyway.
Daft, of course: it will make people reluctant to hire others, including part-time home helps and the rest. So less well off people will find it harder to get one of those starter jobs that give them the first step on the jobs ladder.
The point of government is to provide what the voters want, right?
Yes, we know this is from the Mail and that it has to do with property prices. But still:
The row over ‘new’ grammar schools escalated yesterday after experts warned that many families could be priced out of areas where they are built. Estate agents said that the cost of homes near the new satellite school in Sevenoaks, Kent – which was controversially given the go-ahead last week – is expected to jump by ten per cent. A similar effect would be seen in other parts of the country where similar schools are expected to open, including Maidenhead in Berkshire and Aylesbury, Buckinghamshire.
We know very well that houses in the catchment areas of good schools are more expensive than those in the catchment areas of poor ones. It's part of our evidence kit that people desire schools to be good.
Here we are being offered evidence that the creation of a grammar school increases house prices. That is thus, again and as above, evidence that people desire there to be grammar schools.
Which leads to a small musing on that democracy thing. Which is that government is supposed to provide what the people want to have provided by government. That's rather the point of the whole exercise in fact. And thus if we have evidence that people desire grammar schools then government should be providing grammar schools. Because democracy.
We can in fact go further too. A refusal of government to provide the desired grammar schools is in fact a denial of democracy. All of which makes the continued rejection of such schools by the left somewhat problematic: for they are the ones who rail on about the values of democracy, aren't they?