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.

CEOs really are worth more than they used to be


I’ve speculated before that one of the main reasons that CEO pay has risen quickly since the 1950s might be that CEOs have become more important since then. The question is very important because people who worry about executive pay use this rise as evidence that CEOs are overpaid now – if they were only paid ten times what the average worker was in 1965, how could they possibly be worth two hundred times that now? A new paper tests this hypothesis. It looks at what happens to firms’ values after CEOs die unexpectedly. (To be precise, they look at “cumulative abnormal returns”, or the difference in firm value compared to what was expected, over a five-day period.) If CEOs are important and difficult to replace, firm values should move a lot when they die. If they aren’t important or are easy to replace, they should move a little. Note that we shouldn’t expect firms to always become less valuable – a bad CEO dying should make the firm more valuable, just as sacking a bad CEO does.

Interestingly, they find that the average change in firm value doesn’t change over the 1950-2009 period. That is, the good and bad CEOs cancel each other out. But the variance – how big the changes in value are – has changed a lot. Over the course of 60 years, “the shift in market value caused by an unexpected CEO death increased by approximately $65 million (in 2009 dollars)”.

What that implies is that CEOs have indeed become more important to firms over the past sixty years. The good ones are more valuable, the bad ones are more costly. I find that quite intuitive. Markets seem more competitive now than before, and technological change seems to be moving more quickly. That means that the strategic decisions that a CEO will help make matter more.

It also undermines the claim that CEOs are paid more than they’re worth. For sure, some of the cost to firms will be risk-based – the process of finding a new CEO is costly even if the old one was no good. But the fact that the cost is much greater for some firms than others – and that some firms do better when their CEO dies – seems to be good evidence that CEOs matter, and matter much more now than they once did.

The EU’s pro-cancer tax policy


If there’s anything the EU does well, it’s petty bureaucratic interference that worsens the problem it’s purporting to fix. It was, then, probably a mere matter of time before this approach would lead them to blunder towards e-cigarettes and propose policies that, effectively, promote cancer. The EU is making moves towards increasing tax on e-cigarettes by classifying them as a tobacco product and setting a minimum excise duty. This will, of course, lead to the price of e-cigarettes significantly increasing.

The logic appears to be that smoking is a demerit good that harms the consumer and imposes third party costs. Given the market fails to factor this into the price, the government steps in and places a ‘sin tax’ on the good, in order to discourage its harmful consumption.

Regardless of your views on the effectiveness or desirability of these policies with regards to smoking, there is a small problem with treating e-cigarettes the same way. They do not contain tobacco. Vaping, whatever its risks and flaws, is not smoking. In fact, most vapers use e-cigarettes as a substitute in order to give up smoking, with almost one million doing so successfully.

Whilst largely motivated by the (comparatively) lower risks of inhaling nicotine without tobacco, the considerably lower price of e-cigarettes is another major attraction (the smoother feel, the better taste, and the less unpleasant smell don’t hurt either). Anyone familiar with basic economics understands that raising the price of a product will make more people buy a substitute instead. In the case of smoking, which is more than a little habit forming, this is even more likely to lead people to stick with their established habit rather than switching to the alternative.

It is true that the risks of vaping are not yet fully known. However, the research that has been done indicates that it is 95% healthier than smoking. And, in any case, punitive taxation and crushing regulation can only be justified when the cost of intervention is outweighed by the activity’s perceived cost to third parties. It is arguable that this standard has been met for tobacco. It is absurd to think it applies to vaping.

The motivation for this move is probably the tax revenue that EU Member States fear they will lose if people switch from tobacco to vaping. This seems a poor excuse for imposing a policy that effectively protects carcinogenic products from competition. This also appears to be an incredibly misguided move in the build-up to the Brexit referendum.

Property rights work—even in fish


In theory, it's hard to set up property rights systems over many goods. A classic example is fish in the sea. Usually property rights involve stuff that stays put or whose movement you can control. But dividing up the ocean would be unimaginably difficult and hardly desirable even if we could do it. And fish will swim around.

So it would seem that it's pretty hard to have property rights over fish—who's to say that this fish is mine or yours? When a fish swims into my plot of sea does it become mine, or is it still yours because it came from your plot of sea?

Of course, laws have got around these simplistic problems, and given fishermen "individual transferrable quotas"—each of them are only permitted to bring back a certain number of fish (details explained well here). It encourages efficiency, because if someone else can haul in your take cheaper than you, you can sell your right to them. But unlike a total quota, there's no race to bring in as many as possible in as short as possible a time.

This system has done pretty well at preventing stock collapses and has been emulated in Alaska, New Zealand and elsewhere. But it may have another benefit, according to a new paper by Lisa Pfeiffer and Trevor Gratz: reducing fisherman risk-taking:

Commercial fishing is a dangerous occupation despite decades of regulatory initiatives aimed at making it safer. We posit that the individual allocation of fishing quota can improve safety by solving many of the problems associated with the competitive race to fish, which manifest themselves in risky behavior such as fishing in poor weather. We present a previously unidentified approach to evaluation: estimating the change in the propensity to start a fishing trip in poor weather conditions as a result of the management change. We chronicle a revolution in risk-taking behavior by fishermen (a 79% decrease in the annual average rate of fishing on high wind days) that is due to the change in economic incentives provided by rights-based management.

So that's another win for property rights then!

Trying to judge today's trade by the old rules


We have to admit that we quite like the mental image this conjures up:

The idea of buccaneer Britain trading freely outside the EU is a fantasy

Avast ye scurvy swabs and buy moi foine products!

Yes, yes, and given that one of us just dubbed a pirate's voice for a computer game, thrice yes. However, there is a slight fault in the argument being put forward here about trade:

The first is distance. Imagine if all of Britain's trade agreements were suddenly erased from history, and we had to restart our negotiations from scratch. Our first priority would be to reduce the cost of trade with big, nearby economies. Trade diminishes quite rapidly with distance: half of Britain’s exports go to the EU, which makes up a fifth of the world economy. Meanwhile, the non-European members of the OECD – although they comprise a third of the global economy – only buy a quarter of Britain’s exports, because on average, they are seven times further away.

This very definitely used to be true: the costs of trade were dominated by the simple transport costs of doing that trade. Given the general path dependency we see in the economy it's not all that surprising that the pattern persists. However, this is no longer true of new trade as a result of an invention made back in the 1950s: the shipping container.Certainly, it has taken a few decades to really work through the global economy but the costs of trade now are almost entirely divorced from simple physical distance. If you're on the container network then it costs something under $5,000 to ship 36 tonnes of anything anywhere. If you're not on that network then it is many multiples of that price.

More, a significant portion of that price is organisation, pick up and delivery, the container itself. The actual distance to be traveled doesn't make all that much difference. In this sense, in this transport sense, Chicago is as close to Coventry in geographic terms as Caligari is, as Cologne is. Not entirely you understand, but pretty much so.

The European Union idea, that we should be encouraging trade between close geographic neighbours even to the point of discouraging more long distance routes is a little like the work of the Reverend Malthus. Entirely true until the very date that someone sat down to write it all out. Traditional geography did matter and the system was designed to account for that. But that first container ship set sail 6 months before the Treaty of Rome was signed. The structures of trade based upon geographic proximity were thus being invalidated by the new technology at the very moment that policy tried to enact policies for that geographic proximity.

It has been true that, and current trading patterns still echo that it was true that, geographic proximity was important in trade. The actual distance traveled now is of near no importance at all. The world has changed since we set the rules, you see?

Larry Summers and the Donald Trump problem


This may or may not surprise you but we can't say that we're overly keen on Donald Trump. A Great National Upchuck against the standard ruling classes and Beltway Bandits, yes, that has its amusement and joy to it. But the specific beneficiary not quite so much. What won't surprise you at all is that Larry Summers is just horrified:

While comparisons between Donald Trump and Mussolini or Hitler are overwrought, Trump’s rise does illustrate how democratic processes can lose their way and turn dangerously toxic when there is intense economic frustration and widespread apprehension about the future.

We tend to think it's more frustration about the past or the present ourselves. Something of a rage at the way ion which whoever gets voted in it always seems to be the same government in power. But that's not our point here:

The possible election of Donald Trump as President is the greatest present threat to the prosperity and security of the United States. I have had a strong point of view on each of the last ten presidential elections, but never before had I feared that what I regarded as the wrong outcome would in the long sweep of history risk grave damage to the American project.

The problem is not with Trump’s policies, though they are wacky in the few areas where they are not indecipherable. It is that he is running as modern day man on a horseback—demagogically offering the power of his personality as a magic solution to all problems—and making clear that he is prepared to run roughshod over anything or anyone who stands in his way.

Summers goes on to give examples none of which please us any more than they do him. But again we would identify the real problem as being much more basic.

That is the expansion of Federal power over the decades. for those who believe in the power of government to fix all ills it is of course obvious that government should have more power to fix said ills. But democracies do indeed elect oddities from time to time and a useful rule of thumb is that you should never grant a power to an office that your worst enemy might be occupying in a year or seven hence.

But that is of course what the liberals and progressives have done over these past decades. Ever more power is concentrated in Washington DC, ever more in the executive and this produces conniption fits when there's even a possibility that "not one of us" might end up occupying the Oval Office. The correct solution to this, given that not one of us is inevitably, over the course of time, going to achieve that office is not to give it that power in the first place.

If the Federal Government was the size it should be, back down to the 4 to 6% of GDP that the Founders thought it should be, with executive powers to match, then who would care very much about who got elected?

The same of course applies to our own polity. Various left wingers (including, obviously, the author of The Courageous State) insist that government should have more power to do whatever. Which could even be true but they are missing the vital point that if we have a government with those powers the Tories will get in one day and enjoy those same powers.

Donald Trump is this year's argument for minarchism.

Cut taxes, get money

It’s true: when you cut top tax rates, the rich pay more. UK Chancellor of the Exchequer George Osborne reports that his 2012 cut in the 50p-in-the-pound rate for top earners – to 45p – brought in an extra £8bn of revenue from those earning more than £150,000. It’s a prime example of the Laffer Curve (named after the economist Arthur Laffer): if you tax people beyond endurance, they will – one way or another – thwart you and pay less tax. And we have seen it all before, many times. In 1979 Chancellor Geoffrey Howe cut the UK's top rate of income tax from 83% (!) to 60%, Before the cut, the top 1% of taxpayers paid only 11% of the total take. By 1988 they were paying 14% of the total take. His successor Nigel Lawson cut top rates even more, from 60% to 40%, and receipts rose further. By 1997, the top 1% of earners paid a huge 21% of the total tax take.

Over in America, President Calvin Coolidge slashed top taxes too. As a result, revenues nearly doubled, and the share paid by $100,000+ earners rose from 28% in 1921 to 51% in 1925. Of course, top rates climbed again, but in the 1960s, President Kennedy slashed the highest rate from 91% (!) to 70%. As a result, the share paid by $50,000+ earners rose from 12% in 1963 to 15% in 1966, and total tax revenue grew from $69bn in 1964 to $96bn in 1968. Then in 1981, President Reagan introduced the largest tax cut in US history, cutting all taxes, and slashing top rates from 70% to 50%. In 1981, the top 1% of earners paid 18% of the tax take, but by 1988 they were paying 28%. President George H W Bush raised top taxes to help close the deficit: his move had exactly the opposite effect. But when George W Bush cut taxes, the economy powered ahead, and the tax take from million-dollar earners doubled from $132bn to $273bn in just two years.

It is a pity that, in 2012, George Osborne did not cut the top rate of tax from 50% to 40% – or even less – as we at the Adam Smith Institute advised him to do. He was still not confident enough to take on fully the ‘tax the rich’ arguments so deeply rooted in the psychology of envy. But the rich these days do not get rich from inheritance any more – check the Sunday Times Rich List to see that – they get it from building businesses that create jobs, customer value, and prosperity. A bolder cut would have raised even more revenue that enabled him to cut the deficit, and stimulated economic growth at the same time. Let’s hope he follows the evidence in his forthcoming Budget.

Understanding why the press is generally pro-Brexit


That the British press is generally pro-Brexit is true. But as so often The Guardian manages to take the wrong lesson from this observation:

In 1975, the last time the UK went to the polls over the issue of EU membership, the yes vote won by a very comfortable margin – 67.2% to 32.8%. On that occasion, however, the entire national press was vociferously in support of staying in. The Daily Express, Daily Mail, Daily Telegraph, Times, Guardian, Sun, Mirror and Financial Times all spoke with one voice: it must be “yes”.

Those committed to keeping Britain in the EU can only dream of such a day this time. While most of the papers are yet to formally declare their position, Europhiles can confidently count on a much smaller number of supportive front pages on newsstands on 23 June.

The mistake is to think that newspapers (or other media outlets) lead or form public opinion. That's not what they do at all: they follow it. It is not true that the highly paid staff of the Daily Mail believe that everything either causes or cures cancer, nor that everything including cancer affects house prices. It's that they believe that's what their readership think and or are interested in.

So it is with more political things such as British membership or not of the European Union. Newspaper editors simply are not pondering the subject and then thinking about what they should persuade their readership of. Instead, they're trying very hard to work out what it is that their readership already believes and then pander to those beliefs. As the above notes, they got it largely right in 1975. The majority of the country was pro-EU and so was the majority of Fleet Street. Similarly The Sun does not consider the relevant manifestos before plumping for Labour or Tory. Instead, it tries to work out what the readership of that paper is likely to vote for.

So it is now: the papers can see that there's rather more opposition to the EU than there used to be and are thus trying to get out in front of their own market.

Please do note that we are not calling this one way or the other: nor, despite the well known views of some of us are here here advising either way. This is simply an observation about how the media works. They attempt, as best they can, to reflect the beliefs they think their market already holds. Thus some majority of them being pro-Brexit means, and this is all it means, that those running those newspapers think that some substantial portion of the population is pro-Brexit.

Standing has not been the cause of most football stadium disasters


The main—close to the entire—case for the English & Welsh government's ban on standing terraces in football stadia in the top two tiers is that standing is unsafe, pointing particularly to disasters where many lost their lives. Previously, I pointed out that standing in seated areas (which is an accepted part of the current system) has its own risks. Here I want to point out that many of the worst footballing disasters have not been associated with standing at all. Of course, the 1989 Hillsborough Disaster was associated with fans in standing pens, but though the Taylor Report into the disaster recommended all-seater stadia as a solution, it did not actually blame standing for the tragedy itself. Instead, the report points at poor organisation as the main problem, both in ticketing and crowd management.

The immediate cause of the gross overcrowding and hence the disaster was the failure, when gate C was opened, to cut off access to the central pens which were already overfull.

They were already overfull because no safe maximum capacities had been laid down, no attempt was made to control entry to individual pens numerically and there was no effective visual monitoring of crowd density.

When the influx from gate C entered pen 3, the layout of the barriers there afforded less protection than it should and a barrier collapsed. Again, the lack of vigilant monitoring caused a sluggish reaction and response when the crush occurred. The small size and number of gates to the track retarded rescue efforts. So, in the initial stages, did lack of leadership.

In their excellent 2007 report on the topic (pdf), the Football Supporters' Federation takes this further, pointing out that in the biggest disasters since Hillsborough—in Harare in 2000, Johannesburg in 2000 and Accra in 2001—all occurred in all-seater stadia. The same is true of most disasters preceding Hillsborough, including the infamous incident at Heysel.

Since their paper is now almost nine years old, I did a quick review of all of the other recent stadium disasters I could find, and most of them were unrelated to standing or happened in all-seater stadia as well.

All seater:


There are other examples which are harder to categorise, but which rarely or never look like failures of standing. In most of the tragedies I've deemed unrelated to standing, the crush came when people exited, or when police tried to control crowds by firing indiscriminate tear gas, causing a riot. Others are down to fake tickets and over-attendance. But it's clear that standing has played only an incidental role in most disasters—the case against standing per se is weak.