Finally, even the TUC gets with the program


We've been arguing for a near a decade around here that the UK does not in fact have a gender pay gap. Rather, we've a motherhood, or perhaps a parent, pay gap. In line with Madsen's idea of our function when we started saying it people were shocked at our stupidity. It's now becoming the conventional wisdom, so much so that even the TUC appears to be getting up to speed on it:

Women who become mothers before the age of 33 earn 15% less than similar women who haven’t had children, according to new analysis published by the TUC on International Women’s Day today (Tuesday). The pay penalty for younger mums comes about as they are more likely to have had a significant period out of work or working part-time, before returning to full-time work when their children are older.

Yes, very much what we've been saying. And there's other research which shows that earnings decline for women (on average of course) by 9% or so per child they bear. Other research published for this special day:

A separate study by The Fawcett Society said the motherhood penalty still existed in the UK because mothers were judged to be less committed to their work. Its survey of 8,000 people found almost half believed women were less committed to jobs after having a baby, compared to just 11 per cent for men. Chief executive Sam Smethers said: 'It is clear that when a woman has a baby she is overwhelmingly perceived as becoming less committed to her job, while a dad is much more likely to be seen as more committed. 'This drives inequality and forces women and men into traditional male breadwinner, female carer roles.'

We agree with the evidence there but not with the logic. We're absolutely fine with the idea that anyone can adopt any gender role they desire. But it does remain that most parents do choose to adopt what we might call traditional gender roles concerning their children. Mothers as the primary carer, fathers as the primary provider. If it is people being forced into this then of course we're against it. If people are choosing this then we're just as happy as Larry: liberalism is about people being able to enact their own choices.

And the truth does seem to be that it is those choices made as parents which drive what some call the gender pay gap. After we account for age, education, time in the workforce and all that, mothers make, on average, less than non-mothers and fathers make more than non-fathers. It's in the 8-10% or so range either way. And given that the majority do become mothers, the majority fathers, that's around and about enough to explain that 10% or so gender pay gap that ONS and others report.

Again, if this is imposed upon people then we're agin' it. If it's emergent from peoples' free choices about how to live their lives then not only why would we object but why would anyone want to do anything about it?

Five questions for the “stay” campaign


The “stay” campaign is making much of the purported risks of leaving the EU. They seem reluctant to defend the EU on its merits, apparently taking the view that it’s a disagreeable necessity. Let’s explore this with five questions about risk. 1. Political risk

As a defender of the EU, do you deny that

  • the EU is an inherently political project?
  • its political capital and administrative energies have been focussed on continental unification?
  • despite this, everyone acknowledges the EU’s longstanding “democratic deficit”, with multiple and confusing executive and judicial bodies which are not held to account?
  • one, the ECB, has been at liberty to inflict a classic “bankers ramp”, penalising Greece as a creditor, without regard to the political reasons for its default, in which the EU itself is as much an offender as Greece itself?
  • another, the ECJ, conceives of itself as an instrument of unification, leading to judgements which are arbitrary, intrusive and unpredictable.

In consequence, how happy are you about the risks which the EU poses to basic stability for itself and the UK?

2. Administrative or performance risk

How do you look away from the evidence that

  • twenty one years of failed audits attest to the EU’s administrative dysfunction at the most basic level?
  • the EU’s trade policy is hampered by its focus on the problems of the past, specifically tariffs on goods, rather than the future, that is services and nontariff barriers?
  • the EU’s nontariff barriers give rise to harmonisation which is unnecessary and intrusive, with the World Bank describing its restrictions as second only to Russia?
  • trade policy is also hampered by the EU’s emphasis on deepening its own internal market - in particular its headline currency policy - rather than opening it up to global commerce?
  • this has diverted political capital and administrative resource from less dramatic but more effective measures, stalling its FTA programme, slowing growth in output and external trade, and adding nothing to the UK’s exports?
  • the EU’s treatment of the free market in labour gives rise to uncontrolled migration and prevents national control over entitlement to welfare?
  • the EU’s internal decision-making is so opaque as to give rise to the newly invented word of “comitology”?

How comfortable does this leave you when you think about the risks which the EU’s way of doing business poses to meeting its own objectives?

3. Economic risk

How can you shrug off concerns that

  • the EU’s inherent corporatism has led to its “regulatory capture” by continental producer interests, especially manufacturing and agricultural interests, giving rise to intrusive harmonisation to the detriment of the UK?
  • the EU has de facto given up on free markets in the matters most important to UK, capital and services?
  • the EU’s passporting arrangements for banks risk contagion?
  • the EU’s treatment of the free market in labour has given rise to intrusive regulation on employment conditions?
  • the CAP has led to higher food prices and has restricted supply?
  • the EU’s Internal decision-making (comitology) is barrier to the conduct of business?
  • the UK has suffered from its loss of independent representation in international trade bodies?

How does this leave you as to the risks which the EU’s policies pose to economic welfare for itself and the UK?

4. Reputational risk

How easy do you find it to look away from the spectacle of

  • a prolonged currency crisis threatening disruption among our neighbours?
  • the EU’s treatment of migrants adding to chaos on its borders and doing nothing to ease turbulence in the Middle East?
  • the EU’s tariff walls restricting supply of entry-level manufactures (eg, clothing) from emerging market suppliers?
  • the CAP raising restricting agricultural supply from emerging market suppliers?
  • the EU presiding over the highest level of nontariff measures among major traders but for Russia?
  • the EU admitting to the world’s most complicated tariff regime?

What do your answers suggest as to the risks which the EU’s policies pose to its reputation in the global community, as well as the collateral damage to the UK’s reputation as a member?

5. Finally

Tell the truth, now: are you proud of the EU? do you admire what it’s made of itself? what it has achieved for this country? does its pattern of conduct and outcome sit well with your own standards and values? Or to revert to the formula to which stayers seem to be committed, what necessity justifies the nation’s continued commitment to a body showing such dysfunction?


We should apologise for the “and another thing” character of these relentless questions. But the rhetoric does enable us to go beyond the commonplace that the “stayers” have given up defending the EU on the basis of its good intentions. We can now see that they are challenged to do so on the pragmatic basis that remaining makes for risk-avoidance.

What Should Be the Absolute Minimum Pass Standard in the Bank of England’s Headline Stress Test?

[For the previous blog posting in this series, see here.] Consider the following question: according to the Bank of England’s own guidance documentation, what should be the absolute minimum pass standard in its headline stress test, the test based on the ratio of Common Equity Tier 1 (CET1) to Risk-Weighted Assets (RWAs)?

The Bank of England used a 4.5% pass standard in the test, but I assert that it should have used a pass standard of at least 7% instead.

Why does this matter? Well, if you use 4.5% as the pass standard, the UK banking system performs fairly well under the stress test, but if you use 7% as the pass standard, it doesn’t. [See End Note 1]

This is a big deal because it undermines the Bank of England’s narrative that all is well with the UK banking system.

So what do the Bank’s own guidelines indicate that it should use as the absolute minimum pass standard?

We can break this question down as follows.

First, what is the relevant Bank of England guidance document?

Answer: the guidance document is the Bank’s October 2013 Discussion Paper “A framework for stress testing the UK banking system”.

Then there are two further questions. According to this guidance document:

  1. What is the connection between the pass standard in the stress test and the minimum capital requirement(s) imposed on banks?
  2. What exactly is/are these minimum capital requirement(s)?

On 1:

Page 28 of the Bank’s October 2013 Discussion Paper contains the following statement:

Interpreting these [stress test] results, and reaching a judgement about bank capital adequacy, requires a view on the level of capital that regulators want banks to maintain in the stress scenario. This is often referred to as the ‘hurdle rate’.

This ‘hurdle rate’ is the same as my ‘pass standard’. To continue:

Ultimately, this is a policy decision by the FPC [Financial Policy Committee] and the PRA [Prudential Regulation Authority] Board. But there are a number of considerations the FPC and the PRA Board might take into account in considering the level of capital banks should maintain in a stress.

A key consideration will the minimum level of capital required by internationally agreed standards. Banks need to maintain sufficient capital resources to be able to absorb losses in the stress scenario and remain above these minimum requirements.

My interpretation: leaving aside the judgmental override caveat in the second paragraph, the pass standard should be at least as high as the minimum capital requirements.

This takes us to the second question: what is/are the minimum capital requirement(s)?

The Discussion Paper continues further:

Minimum capital standards have been set internationally by the Basel Committee on Banking Supervision and transposed into European legislation under the Capital Requirements Regulation and Directive (CRD IV).

For example, under the PRA’s proposed implementation of CRD IV, the minimum Pillar I common equity Tier 1 capital requirement will be set at 4.5% from 1 January 2015 onwards.

If you didn’t read any further, you might conclude that the pass standard should be 4.5% because the Bank’s Discussion Paper claims that the minimum Pillar 1 CET1 requirement [note the singular] is 4.5%.

But this is to presuppose that there are no other CET1 minimum capital requirements and this is not so.

In fact, the 4.5% minimum is only one component of a set of CET1 minimum capital requirements [See End Note 2] [note the plural] and the overall minimum capital requirement is the sum of each of the components in this set.

The second component of this overall minimum capital requirement is explained in footnote 2 on the same page:

Consistent with the Basel III Capital Accord, CRD IV [also] requires banks to have at least a 2.5 percentage point buffer of capital [the Capital Conservation Buffer or CCB] above the 4.5% minimum.

Thus, the CCB is an additional minimum requirement on top of the 4.5% minimum capital requirement.  

Therefore, the overall minimum capital requirement is the sum of these two minimum capital requirements and 4.5% + 2.5% = 7%.

And since the pass standard in the stress test must be at least as high as the sum of these minimum capital requirements, i.e., the overall minimum capital requirement, the pass standard should also be at least as high as 7%.


The Bank’s position seems to be that they can ignore the CCB in setting the pass standard because the CCB is a different type of minimum requirement and because the failure-to-comply sanctions associated with the two minimum requirements are different: failure to meet the bare minimum 4.5% requirement could lead to the bank being put into resolution, whereas failure to comply with the CCB minimum requirement would merely lead to the bank being required to file a capital plan with its supervisor who may limit payments of dividends and bonuses.

Such thinking would fail any logic test.

The Bank’s point about the CCB being a different type of requirement is correct but irrelevant; what matters is that the CCB is a requirement nonetheless.

Nice try, but the blind-them-with-an-irrelevant-difference-defence doesn’t work.

Conclusion: according to the Bank’s own guidance document, the absolute minimum pass standard for the CET1/RWA stress test should be 7%.

I also consulted a number of experts for independent opinions. Not a single one was willing to defend the Bank’s interpretation of its own rules.

Consider for example this response from my friend, the Canadian economist Basil Zafiriou:

I read the standard the same as you, Kevin. The CCB is a mandatory buffer, so it has to be added to the CET1 minimum for an overall capital requirement threshold. Suppose a fire safety code requires commercial establishments to have a front and back exit plus a sprinkler system: having a front and back exit meets the exits requirement, but an establishment would not meet the fire code standard unless it also had a sprinkler system.

Still, I doubt you can win this argument with the BoE. You’re relying on logic and they rely on argument by assertion. And since they make the rules, like Humpty Dumpty they can make any rule to mean “just what [they] choose it to mean.” [See End Note 3]

Basil’s analogy with a fire safety code is spot on, ditto the Humpty Dumpty – and we all know what happened to him. The Bank’s interpretation of its own document is like Humpty himself, scrambled.

To give another view on the matter, on p. 24 of his authoritative book on the Basel III system, Safe to Fail: How Resolution will Revolutionise Banking (Palgrave Macmillan, 2014) Thomas F. Huertas states that

Strictly speaking, the capital conservation buffer does not constitute a minimum capital requirement.

At first sight, this statement might seem to support the Bank’s position, if read alone and out of context. But now consider the sentence that follows:

Instead, it represents the level at which the bank has to conserve capital by limiting dividends and distributions and by liming bonus payments in cash to management and employees – ample reason in the eyes of many to regard 7 percent as the effective minimum requirement.

Put another way, his view seems to be that “strictly speaking”, the minimum is 4.5%, but “effectively” it is 7%.

Furthermore, after the end of his first sentence there is a flag to a footnote in which it becomes clear that he is not citing the Bank’s ‘framework’ document at all. Instead, he is citing the Basel Committee on Banking Supervision (BCBS) in its original Basel III framework document, “Basel III: A global regulatory framework for more resilient banks and banking systems.” This footnote refers to pp. 54-57 of the Basel III framework document and an example of what it says is the following, which appears on p. 55 of that document:

129. A capital conservation buffer of 2.5%, comprised of Common Equity Tier 1, is established above the regulatory minimum capital requirement.

This language and the use of the term “minimum capital requirement” in the singular suggest that the BCBS might have seen the CCB as something apart from the minimum capital requirement [sic]. This is a one reasonable interpretation of the BCBS document but the underlying ambiguity in that document (e.g., over whether there is one or more minimum capital requirement(s) etc.) is regrettable.

Be this as it may, Huertas’s statements cannot be cited in defence of the Bank of England’s ‘framework’ document as he was referring explicitly to the BCBS ‘framework’ document and he made no reference at all to the Bank of England’s ‘framework’ document. Nor can there be any ambiguity here: Dr. Huertas was crystal clear what he referred to.

So when is a minimum capital requirement not a minimum capital requirement?

The Bank’s answer: a minimum capital requirement is not a minimum capital requirement when the Bank doesn’t use it as the pass standard in its stress tests, even though it promised it would.

I am tempted to say that this is truly Clintonesque hair splitting, but it is not: it is simply wrong.

The credibility of the Bank’s stress tests should be out there unchallengeable and shining bright for all to see, not dependent on a misreading of its own guidance documentation – and a misreading that just happens to underpin the Bank’s preferred narrative that everything is fine with the UK banking system.

If the UK banking system is as strong as the Bank of England maintains, surely the Bank can build a stronger case that this?

Kevin Dowd

February 29 2016

End Notes

End Note 1:

To be precise, with a 7% pass standard, the average surplus over the pass standard is less than 100 basis points, 2 banks fail the test, 2 scrape through by very narrow margins over the pass standard, 2 banks get small margins over the pass standard, and only 1 performs well.

End Note 2:

To clarify, the other components are the Capital Conservation Buffer (CCB), the Counter-Cyclical Capital Buffer (CCyB) and the Globally Systemically Important Banks (G-SIB) Buffer. I believe that to be convincing, these should be set at the maximum plausible levels they might take under fully phased-in (‘fully loaded’) Basel III. (And I am ignoring the new Systemic Risk Buffer announced in December 2015.) However, for present purposes I focus on the CCB as I am only concerned here to make the point that the Bank should never have used 4.5% as the pass standard in its stress tests.  

End Note 3:

For those of you who forgot your Lewis Carroll, "When I use a word," Humpty Dumpty said, in rather a scornful tone, "it means just what I choose it to mean—neither more nor less."

The Guardian's big new series about the iniquities of modern life


The Guardian has just started a big new series exploring how incomes have changed over the past decades, how income distribution has changed. Everything is terrible, of course. and there's going to be weeks of this dreck apparently. To give you a flavour:

The full scale of the financial rout facing millennials is revealed today in exclusive new data that points to a perfect storm of factors besetting an entire generation of young adults around the world.

A combination of debt, joblessness, globalisation, demographics and rising house prices is depressing the incomes and prospects of millions of young people across the developed world, resulting in unprecedented inequality between generations.

A Guardian investigation into the prospects of millennials – those born between 1980 and the mid-90s, and often otherwise known as Generation Y – has found they are increasingly being cut out of the wealth generated in western societies.

Where 30 years ago young adults used to earn more than national averages, now in many countries they have slumped to earning as much as 20 percent below their average compatriot. Pensioners by comparison have seen income soar.

that pensioners have seen incomes rise if because government policy has been to deliberately and specifically try to raise pensioner incomes.

We might not be too hard on The Guardian. They have gone to the right place, the Luxembourg Income Study, to get their data. They're looking at the right concept too: disposable incomes. However, on every other point they're following the precepts of that Daily Mash t-shirt above, being wrong about everything.

Have a look at the more detailed figures here. Run through the age groups and countries. And those young'uns in this country:

Compared to the national average, you are poorer than people of your age in the past.

Terrible, eh?

In real terms, your disposable income is about $5,130 more than in 1979.

Sorry, what? they're saying that a higher real income means you're poorer? Ahhh....they're not talking about poverty at all. They're talking about inequality. And as it works out, most age groups in the UK have had real income rises of $10,000 to $12,000, except for those young'uns bring up the rear with only $5,000. Which, if we're honest about it, wouldn't surprise us all that much given the vast expansion of the student body (from some 10-12% of the age cohort to 50% or so now) over that time period.

But obviously the neoliberal, in hock to plutocratic capitalism, UK will have performed much worse than those much more caring social democracies like Germany or France? Nope: there the young'uns have seen real disposable incomes actually fall (by $600 and $1,200).

That is, by the measures that The Guardian themselves have chosen, that neoliberal, in hock to plutocratic capitalism, UK has done better than the more liberal and more to Guardian economic tastes social democracies of Europe. Let's hear it for neoliberal plutocratic capitalism then.

And in case you think the Daily Mash is too harsh in declaring the paper wrong about everything, all the time, consider this. They can't even manage to manufacture their own propaganda properly.

One final point. UK real disposable incomes have about doubled since 1979. Let's hear it for neoliberal plutocratic capitalism just one more time.

Ten questions for the “leave” campaign


Let’s ignore the fake alternatives of HMG’s recent papers - the scare stories about the UK’s position with third countries . Let’s also ignore the threadbare character of the government’s “renegotiation” with the “reformed” EU. No-one with a ha’porth of sense pays any attention to either. We can’t however, ignore the fact that the “leavers” need to come up with a crisp account of what they expect the electorate to vote for. Let’s orient ourselves by looking at the table of alternatives below.

Chart 1: Alternative trading arrangements for the UK

table 1

table 1

Sources: ASI, Global Counsel, David Campbell Bannerman MEP, HMG

This table is largely based on material from Global Counsel, a “stay” outfit, but it succeeds in illustrating the political character of the alternatives. The top row shows the present position, ie, that of the “stayers”; the bottom row attempts to capture the objectives of those advocating leave. The colours for the “stayers” at the top more-or-less reverse those for the “leavers” at the bottom. No surprise: the “stayers” are willing to tolerate the current sacrifice of sovereignty to maximise trade access; the “leavers” want to maximise “sovereignty” and will tolerate a bit less trade access. The five rows in the middle set out alternatives, with a rainbow of colours showing their various combinations of trade and sovereignty.

In the event, the “leave” campaign is currently engaging with four alternatives, of which only two show up in the table. All have strident proponents, strengths and weaknesses and unanswered questions.

1.The “Norway option” is advocated by Christopher Booker, Richard North and Robert Oulds. They say that this is the only realistic option, as the tangled web of UK/EU/third-party relations will take years to unravel and that it violates international law and common sense to accept the view (heard from, eg, Bernard Jenkins) that UK could legislate unilaterally so that “with one bound, Jack was free”. They argue that this option takes advantage of the precedent of Norway itself and the existing institution of the European Economic Area, which gives its members greater influence over EU policy than the UK has at present. It gives rise to the following questions:

  • As this option involves accepting almost all of the EU’s existing acquis, ie, its existing complement of policies (in particular, including free movement of labour and a financial contribution to EU funds), how is the leave campaign to communicate it to the electorate as more attractive than the prevailing position?
  • Do these arrangements really hold out the prospect of more influence than that enjoyed by the UK at present?
  • Is it realistic to accept the contention that this option alone conforms to the Article 50 timetable of 24 months?

2. The “Australia option” has been mentioned by Richard North largely as a fall-back from the “Norway option”, but possibly as a more attractive alternative. Australia and the EU have negotiated a “Mutual Recognition Arrangement” (MRA), which eases the supply of goods and services between the two without obliging either to engage in intrusive harmonisation. At first sight, this scheme looks attractive but it has been little examined and gives rise to the following questions:

  • Isn’t it the case that the Ozzie MRA is limited to a small number of technical rules in restricted areas?
  • Does the bargain struck between the EU and Australia (or something realistically within the compass of negotiators) address the UK's reasonable objectives?
  • Is such an arrangement realistically on offer or can negotiators realistically put it on the table within an acceptable timescale?

3. “WTO-plus” is pushed by David Campbell Bannerman in several books including a new one out later this month. The scheme’s attractions are that a minimum (ie, no more than compliance with the “Most Favoured Nation “ [MFN] rules of the World Trade Organisation [WTO]), it requires no assent from the EU. The idea is that after notice has been served under Article 50, negotiations between the EU and the UK will improve trading conditions above the WTO minimum. It gives rise to the following questions:

  • Would such arrangements actually give sufficient access for UK exports (including re-exports) to the EU, in particular those involved in “just-in-time” supply-chains operating on a continental scale?
  • How would such arrangements address services, the largest and fastest growing part of the UK’s economy and the sector in which we have greatest comparative advantage?

4. “Vote ‘out’ to renegotiate ‘in’ ” is no longer favoured by Boris Johnson but remains the objective of Michael Howard. The idea is that this would minimise disruption by giving the UK the best of both worlds. Two questions arise:

  • How is such a scheme to attract those for whom “leave” means “leave”?
  • How would such a scheme avoid accusations of preparing to break trust with the electorate, as political leaders are said to have done in 1975 and since?

We can’t answer every question but here are some preliminary conclusions.

a) Every alternative is imperfect. The question before the “leave” campaign is how they compare to each other. The question before the electorate is how the “leave” campaign’s selected option compares what the “stay” campaign is defending. We address the latter in a companion note, “Five questions for ‘stayers’.“

b) The alternatives on offer are better seen as journeys rather than destinations - in the grim jargon of government, a “direction of travel”.

c) HMG should be working up its own "plan B". It may make for fine campaigning polemic not to do so, but it also feels irresponsible and disrespectful to the electorate.

d) Unilateral legislation may not be able to resolve relations with the EU or others for all time but it can certainly freeze them with third parties for renegotiation at leisure. This is also perfectly consistent with international law. In general we warm to a programme of “freeze, then reform”.

e) Finally, negotiations may proceed better for the UK from an assumption of nothing (ie, WTO/MFN arrangements) rather than an assumption of the current state. After all, psychologists tell us that our species is constitutionally risk-averse: we prefer avoiding loss to making gains. If Brexit comes, better to apply that pressure to our negotiating counterparts!

The “leavers” need to nail their colours to the mast before campaigning officially kicks in, with the Electoral Commission’s decision on “designation” in mid-April. To get there, they need to work up good answers to these ten questions.

Against the Nordic model and in praise of Corbyn


Unusually, I have found myself in complete agreement with Jeremy Corbyn. The Labour leader’s support for decriminalising prostitution is laudable, and it is refreshing to hear endorsement of a civilised alternative to knee-jerk authoritarianism. It is disappointing (if not surprising) that his stance has provoked indignant outrage from Labour MPs and retrograde feminists. Decriminalisation, which is supported by Amnesty International as well as most sex workers, is the only way to protect the vulnerable, respect the autonomy of those who do it by choice, combat people trafficking, and make commercial sex safer, less stigmatized, and less exploitative.

There is evidence that decriminalisation increases the safety of sex workers. It is absurd to imagine that criminalising sex workers (or, indeed, prohibiting brothels) is helpful. Threatening someone with arrest does nothing to help them if they are forced into, rely upon, or actually enjoy their work.

If decriminalised, sex workers are more likely to be taken seriously when reporting abusive pimps and violent customers who are breaking the law. Working in a brothel is safer than working on the street, and it is even safer to work in an institution that is not breaking the law by existing. It is easier to prevent trafficking when sex work is not underground for the same reason that it is easier to monitor the employment practises of McDonald’s than those of a drug cartel.

Interestingly, the main opposition to this common-sense policy now comes from the authoritarian left rather than social conservatives. This is exemplified by the fashionable ‘Nordic Model’, which decriminalises selling sex and criminalises buying it in an attempt to undermine the sex market without harming workers. Although touted as progressive and nuanced, it is actually myopic, unethical, and dangerous.

The Nordic Model is largely motivated by the belief that buying sex is always exploitation because all sex work involves trafficking, coercion, or, at least, economic pressures. This is a gross simplification. Whilst trafficking is a huge problem and pressures exist for many sex workers, others genuinely enjoy their work and many simply prefer it to available alternatives.

Even if it were true that all sex work resulted from desperation, for many it would remain the only or least bad option available. Even if buying sex were always and everywhere inherently exploitative, it would still marginally benefit people who have to rely on it to survive.

It is irrelevant that the Nordic Model does not directly target sex workers: if the model successfully disincentives buying then it is harming the seller by depriving them of income. Either they lose clients or are forced to lower their prices. Alternatively, if workers have plenty of alternatives to selling sex, prohibition is merely a pointless assault on autonomy. And, if criminalisation is not a sufficient disincentive to customers (it tends not to be), then the policy is both pointless and actively causing harm by keeping trade underground.

In which we doff our cap to Chris Snowdon of the IEA


Applause here for Chris Snowdon, one of those fighting the good fight over at the IEA.

The chairman of the Charity Commission has been accused of actively helping a leading critic of charities who inspired a controversial new law curbing their activities.

Documents released under the Freedom of Information Act reveal that William Shawcross urged a trustee on his commission to meet Christopher Snowdon, head of lifestyle economics at the Institute of Economic Affairs (IEA), a free-market thinktank that receives funding from big tobacco and has taken money from at least two oil company giants in the past. Snowdon is the author of a 2012 discussion paper, Sock Puppets: How the Government Lobbies Itself and Why, which argued that government grants should not be used by charities to lobby politicians, as this meant that “government funds the lobbying of itself”.

IEA research was used by the government to justify a new “anti-advocacy clause” that will be inserted into all government grants for charities, prohibiting the money from being spent on lobbying.

The whole piece really needs to be read as it's a just staggering piece of nonsense. For example, that one of the people involved might not be fully signed up to the idea that climate change is an immediate and catastrophic problem is dragged in to prove to all right thinking people that any and every of his other views must be wrong.

On a more basic level of course this is exactly what think tanks should be doing and what we all do do to the best of our ability. Identify what we think is a problem in the current state of things and propose a solution. As an example, a decade ago here we started pointing out that we don't in fact have low wage poverty in the UK. We have tax poverty: the taxes charged to those on low incomes are too high and this is what creates that poverty that people so bitterly complain about. A decade later it is government policy (and it appeared in three of the four manifestos of parties which won over 5% of the vote last general election) to raise the personal allowance to levels where those we might regard as being in poverty no longer pay income tax. not the entire solution but a good start.

So too here with Chris Snowdon and the sock puppets. As he's identified there really are groups out there who live on taxpayer money and whose only activity is to lobby government for changes in the law. This shouldn't happen and the law is changing to make sure that it doesn't.


And there's a delicious irony in what those sock puppets are now complaining about. They are complaining that Chris and the IEA informed government and thus changed policy. The very thing that they insist they should be allowed to do but obviously not Chris and the IEA be allowed to do. That's the sort of argument that really should be met with a staccato burst of ripe Anglo Saxonisms.

There's a reason Robert Reich is a professor of public policy


And not, say, a professor of economics. Here is Robert Reich trying to point out that the economic plans of Bernie Sanders are just copacetic. Everything adds up, kittens will gambol down sunbeams again and my, won't the Republicans be put to the sword?

Not day goes by, it seems, without the mainstream media bashing Bernie Sanders’s economic plan – quoting certain economists as saying his numbers don’t add up. (The New York Times did it again just yesterday.) They’re wrong. You need to know the truth, and spread it.

1. “Well, do the numbers add up?”

Yes, if you assume a 3.8 percent rate of unemployment and a 5.3 percent rate of growth.

That's not even true in and of itself. It's necessary for there to be a 3.8% unemployment rate, a significant rise (several percentage points) in the portion of the working age population actually working and then near a decade's worth of that 5.3% growth rate. That rise in the portion working is most important: because given the demographics we generally think that is the really impossible part: the baby boomers are retiring, coming up to retirement, and people often do not wait for 65 to do so.

However, the real joy of this is that Reich is simply assuming what everyone else is insisting is impossible. No one is doubting that if you could have those three things then the Sanders economic plan would perform miracles. The doubt, in fact the insistence that it will not and cannot happen, is that those three things will not happen.

We could just about imagine a 3.8% unemployment rate at least for short periods of time. We cannot believe that the demographics will allow a larger working age participation and we absolutely insist that 5.3% real growth (the assumption is that inflation will stay down) cannot happen. There simply isn't that much slack in the American economy, meaning that the nominal growth will show up as inflation long before we're able to have 5% and more real GDP growth for years on end.

That is, Reich is insisting it will work if we just accept all the major points which we insist cannot happen.

This might even be great politics but it's not obviously economics of any useful sort. Thus, presumably, the job description.

It's not entirely obvious that comprehensive education is the right solution


That headline is to put it somewhat mildly of course. One problem with truly comprehensive education, where all do attend the same school, is that there's sometimes a minority who really don't want to be there. And who will make this blindingly obvious through their behaviour. Now, true, they do still need to be educated. However, the point and purpose of comprehensive education, the actual underlying moral argument, is that it is better if we are indeed all educated together. And this isn't true so this study says:

A large and growing literature has documented the importance of peer effects in education. However, there is relatively little evidence on the long-run educational and labor market consequences of childhood peers. We examine this question by linking administrative data on elementary school students to subsequent test scores, college attendance and completion, and earnings. To distinguish the effect of peers from confounding factors, we exploit the population variation in the proportion of children from families linked to domestic violence, who were shown by Carrell and Hoekstra (2010, 2012) to disrupt contemporaneous behavior and learning. Results show that exposure to a disruptive peer in classes of 25 during elementary school reduces earnings at age 26 by 3 to 4 percent. We estimate that differential exposure to children linked to domestic violence explains 5 to 6 percent of the rich-poor earnings gap in our data, and that removing one disruptive peer from a classroom for one year would raise the present discounted value of classmates' future earnings by $100,000.

That disbenefit of having the disruptive pupils should obviously be considered against whatever are the social benefits of all being in it together. But given that immense difficulty anyone has in making sure that one of these disruptive pupils does not in fact disrupt we're really pretty certain that this is not considered. It should be.

The In and Out campaigns are both wrong about wages and immigration


Earlier on this week, Lord Rose, head of the campaign to keep Britain in the EU, made a somewhat large mistake in claiming that EU migrants are depressing wages in the UK. The Out campaign has jumped on his blunder, using it as ammunition to argue that leaving the EU will lead to wages rising for Brits.

However, this claim may not be as straightforward as it seems. The issue of immigration and wages has always been a contentious one, and there are a number of perspectives to consider.

Firstly, it is too much of a broad brush to simply say “wages will rise” if we leave the EU. When looking at this issue, we must assess exactly whose wages will be affected. The people whose wages will be most affected by immigration are those who are of a similar skill level to the arrivals. Seeing as the majority of EU immigrants are unskilled, it is therefore the lower-skilled workers whose wages are most affected, as they can be substituted for immigrant workers, who are often prepared to accept lower pay. In other words, in the UK it is only the bottom 20% of earners who are likely to be negatively affected by immigration.

While it may be fair to blame the EU for this increase in unskilled work supply (of the unskilled workers who arrived in the EU in 2013, 80% were from the EU), there is no evidence to show that these arrivals in fact contribute to a decrease in income levels across the population as a whole. 

A 2008 study shows that while 20% of the workforce may be negatively affected, the decrease in wage levels is unlikely to be more than -1.5%. Furthermore, a 2012 study showed no statistically significant impact on claimant count rates as a result of immigration, suggesting that unemployment of UK nationals was not affected either. The evidence actually shows that there is in fact a net positive impact on wages in the UK, as higher-skilled worker’s wages benefit from immigration. From a 2013 paper by Dustmann:

These estimates indicate that an increase in the foreign-born population of the size of 1% of the native population leads to an increase of between 0∙1% and 0∙3% in average wages. As the average yearly increase in the immigrant–native ratio over our sample period (1997–2005) was about 0∙35% and the average real wage growth just over 3%, immigration contributed about 1∙2–3∙5% to annual real wage growth

It’s therefore clear to see that the claims regarding wages from both campaigns can be debunked. Dustmann isn’t the only one to argue that immigration has a minimal effect on wages either, with other economists such David Blanchflower recently arguing the same thing.

Although it is true that wages on the bottom of the scale are negatively affected, restricting EU immigration does not seem like the best way to rectify this. The benefits of immigration and wealth created as a result would more than pay for the redistribution of wealth to those who lose out, for example through the system of tax credits. The EU may have many problems, but the case that immigration leads to decreased wages is not one.