Happy Brexit Day

As we celebrate the UK regaining its independence today, we think back to the time when the seeds of that event were sown. In 1975 people voted eagerly to remain part of the European Economic Community we had joined in January 1972. The accession of Jacques Delors in 1985 to be President of the European Commission made it clear that the real agenda was the creation of a United States of Europe. Delors, an unelected civil servant, demanded to be treated as a head of state when he visited foreign countries. 

Speaking at the UK’s Trade Union Congress in 1988, he in effect bid for the support of fellow Socialists by promising that the leftwing policies the UK people would not vote for could be imposed from a European level. Regulations and controls would come from afar to foster centralization and collectivism. What had been hailed as an economic alliance was now morphing into a super-state, a European Union with its own flag and national anthem, and with ambitions to acquire its own currency and its own army.

The UK never wanted to be part of a United States of Europe, or to surrender its ability to make its own laws to a Brussels-based bureaucracy, but the elite of the political bubble class joined with Brussels in thwarting that desire. Even when the 2016 referendum gave the largest democratic vote in UK history to exit the EU, its acolytes used every piece of legal and political chicanery to prevent that vote from taking effect. Last December UK voters sent another clear message, “Get Brexit done.”

Today is an historic day as the UK steps out from being a peripheral player on the Northwest corner of Europe, always outvoted when it tried to curb the grandiose plans of the Eurocrats. Now we step boldly and confidently into a wider world, one in which we can work for free trade and free peoples. We can now allow UK society to evolve and change as people choose to make it do so, instead of being made constantly to conform to limiting rules made from afar.

The UK faces a bright future as an independent nation, freely choosing with whom it wishes to ally, and freely choosing the rules and conventions that will allow innovation and invention to flourish at home. We are moving out of a restrictive and protectionist trading bloc, and into a world in which we can trade and prosper with like-minded peoples. 

The decision that takes effect today will change the future of the EU as well as our own. The myth of constant progress towards ever closer union has been undermined by our departure, and the EU will now have to face the prospect that other members might follow the UK’s lead as they see us prosper. 

This is a good day for liberty, for free trade, and for the future of the UK and the world we intend to influence. We celebrate it as we step out into that wider world.

Happy Brexit Day.

Obviously the coffee shop manager makes more than the curator

What strikes us as a strange complaint:

Tate Britain has defended advertising for a head of coffee with a salary of nearly £40,000 – more than the average wage of a London-based curator – after critics said the role highlights how low museum professionals’ wages are.

The wage comparison site Glassdoor states that the average annual wage for a curator based in London is £37,300. The Prospect union said the pay discrepancy was a reminder of how badly paid museum professionals are in comparison with other jobs in the arts sector.

Alan Leighton, Prospect’s national secretary, told the Guardian that heritage-specific roles were paid “appallingly”, despite the fact that without qualified specialist workers there would be no galleries or museums. “It’s time that was recognised and those roles rewarded accordingly,” he said.

As we have pointed out before all jobs pay the same. Not wholly and entirely of course, but the desirability of a job in its non-cash elements will reduce the cash on offer, the undesirability of a job in its non-cash increase.

There are far more fine arts graduates than there jobs as museum curators, there are many, many, people who would love that job of scholarship and showing the tourists around than there are opportunities to do so. Therefore the cash compensation is not all that high.

True, we do have to put aside the usual jokes about all arts graduates competing for those jobs as baristas in this case. But there are fewer people who actually desire a lifetime staring into coffee cups than those lusting after one examining and curating the glories of the past. Pay is therefore lower.

More modern scholarship might call this the compensating theory of wage differentials, or perhaps the hedonic theory of wages. Whatever we call it though it is true - jobs that are inherently fun and desirable pay less money than those less so.

Given how well established - even, given the ancient nature of this wisdom - this point is we’re a little surprised that these conservators of the past don’t already know this.

We're not impressed by this from Angus Deaton

Yes, yes, we know, think tankers arguing with a Nobel Laureate - but cats may look at Kings all the same.

This does not impress:

Many economists, especially on the right, argue that inequality is nothing to worry about. Why? Look at the Gini coefficient, they say. While it is true that this headline inequality measure rose quite quickly in Britain when Margaret Thatcher was prime minister, it has actually been pretty flat or even falling for 30 years. The US, they acknowledge, is a good deal more unequal than Britain, but even there the Gini has hardly moved since the financial crisis, and so—these economists say—it can hardly be blamed for the arrival of President Trump.

All of that is true. And so there is the insistence that we should look at other methods of measuring inequality. Which does, to us, smack rather a little too much of the numbers don’t show what is convenient for the argument so let’s use some others.

This is worse:

It is flexible, too. It can be applied not only to income—about 0.35 for Britain, and about 0.47 for the US

The British number is the post tax and post benefits number. The American the pre-, for the US number is usually calculated before the effect of the tax system and before the vast majority of the welfare - including only direct cash transfers, not goods and services in kind or via said tax system. Which is how most American poverty and income inequality is alleviated, through the tax system and in kind.

Perhaps inequality is the great problem of our times, possibly it should even be measured by another number than the Gini. But we do think we’d all be aided by very senior economists indeed at least using righteously comparable numbers. Which isn’t what is being done here.

Tsk.

Tale of Two Economies

In the 1950s the two states of Cuba and Hong Kong were largely similar. They both had a GDP per capita of roughly $4,500 in today's money.

Today the picture is quite different. For every thousand people in Cuba just 30 have a  computer, but in Hong Kong there will be 600 for every 1000 residents. Hong Kong has an average salary of $26,000 compared to $400 in Cuba. Yes, you read that right. Cuba is a country where doctors earn salaries of $600 a year. The two countries started from the same low base and through their experiences of communism and capitalism have diverged to such a stark degree. 

Only on a few measurements do the two appear close. Life expectancy is surprisingly high in Cuba at 79.74 years (it's still higher at 84.23 in Hong Kong). Indeed Cuba's healthcare is one of the few items still singled out in adoration by Western Commies. However, that may be down to Cuba spending 10% of GDP on healthcare compared to 2% for Hong Kong (only paying your doctors $600 a year also probably helps — not to mention pocketing the cash that foreign governments pay when the doctors are sent overseas). 

Neil Monnery's book A Tale of Two Economies gives an interesting account of the two men responsible for the construction of the two starkly different systems: Che Guevara and Sir John Cowperthwaite. Guevara after helping Castro into power also helped to construct Cuba's communist economic system and held key posts in government. The less well known Cowperthwaite served in a number of posts in the British administration of Hong Kong including over a decade as financial secretary. He pursued non-interventionism in the country and free market principles which have helped deliver remarkable prosperity to the territory, an approach that was worlds away from Guevara’s centralised technocratic system. 

The history provides evidence of a fairly good experiment of two countries at similar stages of development which, taking two different models, have resulted in two incredibly different outcomes. A similar story can obviously also be found with East and West Germany. No matter how well intentioned and high the principle employed, it has been regularly demonstrated which is the better of the two systems.

Importantly however, Monnery distinguishes about the type of capitalism. Crony capitalism can be just as much a hindrance as Communism. It was crony capitalism which the Cubans rejected in their revolution in the late 1950s. It is also one that still racks many developing nations — and even to a lesser extent the developed ones too from time to time.

With the recent preferential treatment of Flybe, this is evidently an important nuance that still seems to be relevant. Seeing that Flybe has been in trouble for years it is worth remembering the remarks of Cowperthwaite’s successor, Sir John Haddon-Cave when describing their policy of positive non-intervention

 ‘that it is normally futile and damaging to the growth rate of an economy, particularly an open economy, for the government to attempt to plan the allocation of resources to the private sector and to frustrate the operation of market forces.’ 

To forget the lessons of Cuba and Hong Kong is to forget the risks and consequences of crony capitalism - but more importantly, it is to forget the costs of socialism. 

The high frequency trading tax

An unfortunate calculation here, forgetting that while there are costs to everything there are also benefits to everything:

High-frequency traders earn nearly $5 billion on global equity markets a year, creating a “tax on market liquidity”, according to a report by the City watchdog.

The first part of this being that there are costs to doing high frequency trading. The profits of the sector are not that $5 billion.

The Financial Conduct Authority (FCA) found that “latency arbitrage” races - when traders profit from reacting more swiftly to financial information than their rivals - take five to 10 millionths of a second, occur once a minute for FTSE 100 stocks and account for about a fifth of the overall trading volume.

The report said the practice leads to “a never-ending arms race for speed, to be ever-so-slightly faster to react to new public information”, which harms investors.

Rather more importantly, to call it a tax on liquidity is more than a little odd. For HFT provides more liquidity to the market. They are, after all, that fifth of trading volume. What does more liquidity mean? A smaller spread between buy and sell prices. That is, the market maker tax is diminished.

As it happens, at least coincident with the rise of HFT that market maker tax, that spread, has fallen by at least 99% in recent decades. For most large stocks it is, for the retail investor, now nothing.

There’s a reason why economists insist on a cost benefit analysis. Because we do need to know the both before we try decide upon the desirability or not of some thing.

It's what you believe that ain't so that matters

Mark Twain pointed out to us that it’s not what you don’t know that’s dangerous, it’s what you insist is true but ain’t that is. And example of which in this opening from a Guardian piece:

For the past 45 years, just about all of the income gains of America’s increasing productivity have gone to the elite and upper-middle class, while real worker wages have remained roughly flat.

This links to this calculation by the EPI. The problem with the calculation being that Paul Krugman explained why it’s not true, in detail - in fact in any of its details - well over a decade before it was first constructed. As Krugman pointed out about an earlier attempt to make the same claim:

"Many advocates of free trade claim that higher productivity growth in the United States will offset pressure on wages caused by the global sweatshop economy, but the appealing theory falls victim to an unpleasant fact. Productivity has been going up, without resulting wage gains for American workers. Between 1977 and 1992, the average productivity of American workers increased by more than 30 percent, while the average real wage fell by 13 percent. The logic is inescapable. No matter how much productivity increases, wages will fall if there is an abundance of workers competing for a scarcity of jobs -- an abundance of the sort created by the globalization of the labor pool for US-based corporations."

What is so remarkable about this passage? It is certainly a very abrupt, confident rejection of the case for free trade; it is also noticeable that the passage could almost have come out of a campaign speech by Patrick Buchanan. But the really striking thing, if you are an economist with any familiarity with this area, is that when Lind writes about how the beautiful theory of free trade is refuted by an unpleasant fact, the fact he cites is completely untrue.

More specifically: the 30 percent productivity increase he cites was achieved only in the manufacturing sector; in the business sector as a whole the increase was only 13 percent. The 13 percent decline in real wages was true only for production workers, and ignores the increase in their benefits: total compensation of the average worker actually rose 2 percent. And even that remaining gap turns out to be a statistical quirk: it is entirely due to a difference in the price indexes used to deflate business output and consumption (probably reflecting overstatement of both productivity growth and consumer price inflation). When the same price index is used, the increases in productivity and compensation have been almost exactly equal. But then how could it be otherwise? Any difference in the rates of growth of productivity and compensation would necessarily show up as a fall in labor's share of national income -- and as everyone who is even slightly familiar with the numbers knows, the share of compensation in U.S. national income has been quite stable in recent decades, and actually rose slightly over the period Lind describes.

The question here is not why Lind got these numbers wrong. It takes considerable experience to know where to look and what to worry about in economic statistics, and one should not expect someone who does not work in the field to be able to get it right without some guidance.

The thing being that the people at the EPI do have considerable experience, do know where to look and what to worry about. They even have guidance - Krugman has just provided it - and yet they still charged off down the path of telling us something that is completely untrue. Which goes on to be widely believed and widely cited.

That is, having been told how not to compose an informative statistic they went off and composed the entirely misleading one. For they compare wages, not compensation, use different inflation indices and so on. They also fail to make that balancing check against the labour share of the economy.

This, of course, being just another one of those reasons why political management of an economy is so inefficient. It is so often guided by beliefs that just ain’t so.

It's the basic concept we disagree with here

The Observer tries to convince us that the digital tech tax is righteous and justified. The very reasoning they use, that underlying concept, being the thing that we disagree with:

Talk of introducing an internationally agreed digital tax is all very well – but it could take years to implement, and looks like a delaying tactic. Amazon and similar companies take large profits out of Britain. It is only right they should put more money back through fair and proportionate taxation.

This is to misunderstand what profit is. Profit being the value added by the activity and value added is what we actually want in an economy. Value added being what GDP is (or, if you prefer, GNP, GNI, NNI, whichever flavour floats your boat).

Consider the basics. In a market economy the various inputs into any process are priced at their value in alternative uses. Land, labour, capital, further down the line into computers, telecoms and all the rest, the price is determined by what people are willing to pay for them to do all the other things that are done in the economy. Our aim in having an economy at all is to have more value added, for that GDP is, by definition, either all production, or all incomes, or all consumption.

Profit is the value added by this specific process, or organisation, above those prices of those resources being used to do other things. That’s just what it is. We like people making profits - in a free market of course - because this is us all getting richer. More value is being added in our economy.

The idea that we should therefore tax people for making us richer doesn’t make sense. It’s a perversion of the basic truth about the economy.

Sure, we’re entirely happy with the idea that we have a progressive tax system, that the wider shoulders carry more of the burden. But that’s righteously a function of the income tax system, not a corporate one.

It’s not even true that the likes of Amazon make money and then run away. They invest heavily etc. But rather more than that there’s that Amazon Effect. Studies in the US - and there’s no reason at all to think it’s not true here - have shown that the simple existence of the company (using it as a proxy for internet shopping in general) has knocked 0.1 to 0.2 % a year off inflation over the past couple of decades. Why do we want to tax the people who have done that?

Foreigners invest here, reduce inflation by doing so, that people voluntarily flock to them shows consumers like their offering, the whole shebang adding significant value to our lives. And this is the reasoning to tax them? Seriously folks, get a grip.

No, it's not Mr. Anderson, it really won't be

A claim here that can be rejected out of hand:

Flybe has requested a £100m loan from the Government in the latest twist in its bid for survival.

The appeal, first reported by the Financial Times, comes amid a war of words between Flybe, the Government and rival airlines over the extent of government support afforded to the perennially loss-making airline.

Boss Mark Anderson has hit out at suggestions of a Flybe “bailout”. He says any loan from the state would be on commercial terms.

Such a loan will not be on commercial terms. Commercial terms here meaning at a level of interest commensurate with the risks of the loan not being repaid.

Walk though the logic with us here. Why is FlyBe even asking for a government loan? Because it cannot find the money it needs in the commercial baking world at a price it is willing to pay. If it could find that money from willing bankers then it would not be asking the government. The very fact that it is so asking is all the proof we need that it’s not a loan on commercial terms.

Hey, it might even be true that it can find a commercial loan but at what it regards as a high price. The request to government being, they think, something that will produce a lower price. But that very lower price they think they might get is the proof that it’s not on commercial terms, isn’t it?

If it were a fully commercial price then there wouldn’t even be the request to government. Therefore it’s not at a fully commercial price, is it?

The thing is, this is actually true

The Guardian treats us to a jeremiad about how political appointees in the Trump Administration are damaging the environment by being political:

“There’s too much dead and dying timber in the forest, which fuels these catastrophic fires,” Zinke said. “Proper management of our forests, to include small prescribed burns, mechanical thinning, and other techniques, will improve forest health and reduce the risk of wildfires, while also helping curb the carbon emissions.”

The thing about that is that it’s true. As with the Australian fires. Both environments have developed and evolved in the presence of frequent fires. The attempts to entirely curtail fires over the past few decades have thus built up the fuel and made the fires, when they do happen, worse.

The point being that frequent fires are low level fires, burning underbrush. If they are very occasional, with a significant fuel load, then they burn the canopy too. No one seriously doubts this basic point.

Well, except all those who want to blame the fires on climate change of course. That being politics just as much as anything the Administration is being charged with.

恭喜发财 — Gung Hei Fat Choi.

Happy New Year to our Chinese readers!

The Year of the Rat has begun. The rat is typically associated with yang, the beginning of a new day. It is also associated with wealth and surplus in Chinese culture. Chinese people have achieved immense success as great traders, as builders of creative and culturally stunning societies in China, in Taiwan, Hong Kong, and Macau — as well as settled migrants to countries right across the world, including fortunately the UK and the USA.

But China itself continues to be ruled by the dictatorial Chinese Communist Party. As we enter the Year of the Rat, the first first of all zodiac animals, China is at a crossroads.

China’s population is on the cusp of shrinking, while its economy continues to be much smaller than the global superpower of the United States of America. An expansionist foreign policy meeting global opposition, an aging population, a leader that has designated himself ruler for life, overreach in Hong Kong, belligerence towards Taiwan, the ongoing trade war with the Trump administration, questions in the West about security concerns with Chinese technology and state-involved enterprises, environmental concerns, the increase in debt of public firms. That’s before talk of organ harvesting, questionable treatment of prisoners, political imprisonment, the destruction of religious sites, a social grading system based on the moral judgements of the Chinese Communist Party, the mass internment camps for the Uighur people. 

It’s not a pretty picture, and it’s getting worse. From decades of increasing economic freedom being the predominant story of Chinese success, we can seemingly only look forward to further retractions in personal and civic freedoms — in exchange for nationalism abroad and subservience to the state at home. 

In Hong Kong, China’s grip continues to dominate debate — despite Carrie Lam’s best attempts to get away from it all at Davos this week — and its as good a time as any to remember that Britain has a special responsibility to act as guarantor for the liberties and way of life in the territory. 

As part of our obligations under the Sino-British Joint Declaration we guarantee until 1947 the right to free assembly, the right to a free press, freedom of religion, free expression, the move to universal suffrage for officials, and the right for Hong Kong arms of government’s operations in the territory to not be controlled or coerced by the Chinese mainland. 

We have failed to uphold these rights against the slow mission creep of the Chinese Communist Party in recent years, we have failed to give Hong Kong’s citizens an alternative to Communist rule, and we have failed to stand by those that British in nationality in the territory. 

It’s not too late to stand up for is right, and this Chinese New Year is a wonderfully auspicious moment to do so.

It is customary to offer gifts of red packages at Chinese New Year. Might I suggest the British government looks, as we leave the EU, to give ethnically Chinese British Nationals (Overseas) a red, white and blue package instead? One filled with a blue passport, that can guarantee their freedoms and turn the tide of the debate in Hong Kong from one of fear to one of hope. 

If people have an out, they must be given a reason to stay. China would be forced to do better. 

The Chinese people deserve better than their current Communist masters on the Mainland but we’re limited in what change we can affect. In Hong Kong that’s not the case. We have a duty to speak out and stand up for those clamouring for the freedoms we all enjoy every day.

This country has the ability to do this and the responsibility under law to do it too. Importantly, Boris has the majority. 

It’s imaginative, cunning, adaptable, and a success just in the nick of time. All the best attributes for the year of the Rat. 

恭喜发财 — Gung Hei Fat Choi.