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"Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice" - Adam Smith

In a gift economy we'll all still be getting richer even as GDP stays the same

Written by Tim Worstall | Tuesday 14 January 2014

It's a fairly standard observation these days that economic growth isn't as fast today as it was in the decades immediately post WWII. Quite why is always a bit of a puzzle: obviously, immediately post WWII Europe was nowhere near the technology limit so catch up growth was possible. And as China is showing us today catch up growth can indeed be faster than when you are trying to figure out how to invent the new stuff not just copy the old. There are myriad other speculations as to cause as well but one that is obviously in part responsible is that we've had a rise in the non-payment part of the economy more recently. All that open source and collaborative stuff being done in software for example.

This is an interesting paper that tries to put some numbers on the value of just one of those projects, the Apache server suite:

Is that a lot of Apache? Standard principles of GDP measurement compare a free good to the pricing for its closest substitute, which comes from Microsoft’s server products. Using this approach, Frank and I estimate that use of Apache potentially accounts for somewhere between $2 billion and $12 billion in the United States. Apache’s advanced functionality provides reasons to think the estimate tends toward the higher number, but, as yet, standard methods can’t settle on a single number. Is that a lot? That equates to between 1.3 percent and 8.7 percent of the stock of prepackaged software in private fixed investment in the United States. That looks like a lot to me, especially for one piece of software.

In comparison to a $15 trillion economy that's not much: but it is indeed something all the same. And there are many such projects as well where we're all getting good use out of things that we're not having to pay for.

And those numbers are also a gross underestimate. For what they've done is valued Apache at what it would cost to get the same services from the paid for alternative (one of Microsoft's bits of kit). But of course that alternative is made cheaper by the fact that there is this free competition to it. And that's not all either: we're still grossly undervaluing the contribution being made.

For the true addition to the wealth of nations is in fact the use value that we get out of whatever it is: as with Smith's definition of the labour theory of value of course. And I think that's where our economic statistics are misleading us: I think there's far more wealth being enjoyed these days than is actually being counted in the cash transactions that flow around the economy. Apache, MySQL, Google's search engine, these are part of it yes. But think of the fall in telecoms prices in recent decades: the effect of these is that the economy is shrinking but does anyone really think that we are poorer as a result of being able to make a transatlantic phone call without requiring a second mortgage?

As so often occurs to me I think at least part of what we're observing is a function of our not measuring what's happening very well.

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It's not exactly news that Will Hutton is wrong now, is it?

Written by Tim Worstall | Monday 13 January 2014

I do so like it when two stories turn up on the same day illustrating an important point for us. In the first one Will Hutton is telling us all how regulation is just essential for the economy to thrive:

The low regulation lobby is in effect creating high-return, low-risk business fiefdoms largely free of social and public obligations. Worse, shareholders and investors set these returns against what they might expect investing in frontier technologies and innovation. Why do that when you can make more certain and higher profits in pay-day lending, bookmaking or the drinks business? The Cameron-Osborne-Hunt-Paterson mantra leads straight to a low innovation economy and a high-stress, low-wellbeing society, while offering unnecessarily high returns to those at the top.

Reality is very different. Business is part of the society in which it trades. Regulation and legislation, far from burdens, are crucial grit in the capitalist oyster. They are proposed in our democracy because they will reduce public and social costs that otherwise society has to bear. By obliging business to accept the costs it creates, it raises genuine innovation. It is time to call time. We don't want ministers acting as surrogate corporate lobbyists. We need them to fashion a new compact between business and society.

And then we have the head of Intercontinental Hotels telling us that there must be more regulation:

Fast-growing internet companies such as Airbnb should be subject to the same regulations as traditional firms, the chief executive of InterContinental Hotels Group has said. Richard Solomons claimed there is a “slight naivety” about online businesses and governments should treat internet firms – many of which are developing into global powerhouses – in “exactly the same way” as traditional companies. Traditional hotel firms, which are often far bigger employers than internet ventures, are currently at a “disadvantage”, he said. The hotels chief cited the accommodation website Airbnb, whose financial backers include the Hollywood actor Ashton Kutcher, as one example where online firms were subject to different rules.

The website, which allows people to rent out spare rooms to visitors, was “an interesting concept”, he said. “But what about fire and life safety, what about food safety, what about security issues, what about cleanliness – all those things that we [hoteliers] are required to keep to a standard? What about paying tax? “If you are paying somebody for a service and that service is sold as a major operation, it’s becoming a big business then why would different standards apply? “Governance and regulation needs to treat online businesses the same way as existing businesses so that existing businesses are not put at a disadvantage.”

Or as we might put that, you've got to impose regulation on those upstart internet firms in order to protect my business.

And contrary to what Hutton says (look, that's obvious, reality is always contrary to what Hutton says) that's what most regulation does do. It's why it's so welcomed by incumbent businesses: it means that those changes in technology, rises in productiivty, growth in the economy in short, have a much harder time killing off those incumbents. And we as consumers would very much like there to be less of that regulation so that those upstarts can succeed.

As to the larger issue, once again Hutton is showing us that there's nothing quite so conservative as the British Left. But we already knew that, didn't we?

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Adam Smith and the solution to the Easterlin Paradox

Written by Tim Worstall | Sunday 12 January 2014

We have yet another attempt to solve the Easterlin Paradox. This one telling us that actually, it's not just that everyone getting richer doesn't make us all more happy, it's that everyone getting richer makes us all more unhappy. It's really not something that I find all that persuasive.

Those with long memories will recall that I have touched upon this subject before. And I've claimed that the mistake that is being made here is that people are looking at levels of incomes. Whereas, given what we know of human psychology (things like loss aversion and so on) what we actually ought to be looking at is changes in incomes. Rising incomes make people happier: falling incomes make them less happy. The link to levels of wealth is simply that the currently rich countries have had rising incomes for a couple of centuries or so. What's slightly confused me as I make this point is that I can't find anyone else making it and I didn't understand why.

Until, of course, I opened the good book for a bit of a reread:

It deserves to be remarked, perhaps, that it is in the progressive state, while the society is advancing to the further acquisition, rather than when it has acquired its full complement of riches, that the condition of the labouring poor, of the great body of the people, seems to be the happiest and the most comfortable. It is hard in the stationary, and miserable in the declining state. The progressive state is in reality the cheerful and the hearty state to all the different orders of the society. The stationary is dull; the declining melancholy.

Adam Smith got there a couple of centuries before either I or Easterlin. It is the changes in incomes that produce the happiness, not the levels.

Ah well, worth being reminded in 2014, as I have been in previous years, that I am capable of coming up with good ideas just as I am of coming up with original ones. We're still on the hunt for that one that is both of them at the same time of course.

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Thomas Piketty's latest bright idea

Written by Tim Worstall | Saturday 11 January 2014

You're going to hear a great deal about Thomas Piketty's latest bright idea in this coming year. And remember when you do that I pointed out this inconvenient fact first. If he's right then the entire story we've been told about inequality reductions and changes over the past century is wrong. And there's something very important about that story being wrong.

Piketty's basic claim is that he's found the two golden rules that explain wealth inequality (and do note that it is wealth, not income, that he's talking about). They are:

The wars and depressions between 1914 and 1950 dragged the wealthy back to earth. Wars brought physical destruction of capital, nationalisation, taxation and inflation, while the Great Depression destroyed fortunes through capital losses and bankruptcy. Yet capital has been rebuilt, and the owners of capital have prospered once more. From the 1970s the ratio of wealth to income has grown along with income inequality, and levels of wealth concentration are approaching those of the pre-war era.

Mr Piketty describes these trends through what he calls two “fundamental laws of capitalism”. The first explains variations in capital’s share of income (as opposed to the share going to wages). It is a simple accounting identity: at all times, capital’s share is equal to the rate of return on capital multiplied by the total stock of wealth as a share of GDP. The rate of return is the sum of all income flowing to capital—rents, dividends and profits—as a percentage of the value of all capital.

The second law is more a rough rule of thumb: over long periods and under the right circumstances the stock of capital, as a percentage of national income, should approach the ratio of the national-savings rate to the economic growth rate. With a savings rate of 8% (roughly that of the American economy) and GDP growth of 2%, wealth should rise to 400% of annual output, for example, while a drop in long-run growth to 1% would push up expected wealth to 800% of GDP. Whether this is a “law” or not, the important point is that a lower growth rate is conducive to higher concentrations of wealth.

In Mr Piketty’s narrative, rapid growth—from large productivity gains or a growing population—is a force for economic convergence. Prior wealth casts less of an economic and political shadow over the new income generated each year. And population growth is a critical component of economic growth, accounting for about half of average global GDP growth between 1700 and 2012. America’s breakneck population and GDP growth in the 19th century eroded the power of old fortunes while throwing up a steady supply of new ones.

Leave aside for a moment whether these things are true (I have some doubts: Piketty has a habit of not looking at consumption inequality which is the thing we might actually be worried about). Just assume that they are for a moment.

Our first reaction therefore would be that if we desire less inequality then we must have faster growth. We must therefore have a supply side revolution, tearing down much of the bureaucratic state that limits said growth. Excellent.

But perhaps people don't want to do that: so, what could we do about this rising inequality? Well, we'll get the usual litany, won't we? Strengthen unions, redistribute more, higher inheritance taxation and so on. The argument will be that after all, as the usual story goes, these are the things that reduced wealth inequality before so they will again.

Ah, but that story doesn't work. For look at what Piketty is actually saying: the reduction in inequality wasn't as a result of unions, taxation, minimum wages or redistribution. It was simply that growth was faster than the increase in old wealth. So we cannot point to those supposedly tried and trusted methods of reducing inequality. For the very research that tells us that inequality is going to keep rising is the very same research that tells us that those methods didn't reduce it last time around.

This obvious point is one that's not going to register with anyone at all unfortunately. Even though it is also true as well as being obvious. Everyone to the left of us (which is, to be fair, quite a large number of people) is going to entirely ignore this uncomfortable point. Their very proof that wealth inequality is going to increase will also be the very proof that the standard prescriptions for reducing wealth inequality don't work.

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There's no such thing as a free minimum wage hike

Written by Sam Bowman | Friday 10 January 2014

Paul Kirby, who was head of the No. 10 Policy Unit until last year, has a long post calling for a “dramatic, historic increase" to the minimum wage, bringing the levels from the current £6.10/hour to £10/hour in London and £8/hour in the rest of the country. It’s a bold post, but ultimately most of his arguments fail. In this post I try to address the key points he makes in favour of a hike.

Low wage earners are, overwhelmingly, providing services for domestic consumers within the UK economy. They work in shops, cafes and hotels. They cut our hair, they clean our houses, they look after our kids and they care for our elderly.  They are not  in manufacturing, competing on the price of their labour with other countries. What they do has to be done in this country. Nor is it tradable with other countries. If the Minimum Wage increases, it impacts equally on all of an employer’s competitors, so there is no disadvantage.

Even though nobody can switch to a cheaper hairdresser in India, they can get their hair cut less often, or have their homes cleaned less frequently, or send their children to creches with fewer minders per child or their parents to care homes with fewer carers. Kirby is assuming that demand for domestic services is inelastic – that is, it does not change much according to price. Obviously, this may differ between different services, but in without evidence to the contrary (Kirby gives none) it does not seem reasonable to assume that people’s demand for services will stay the same even if the prices of those services rise.

Bear in mind that a minimum wage increase would only affect the bottom of the market, where you would expect customers to be the most price-sensitive. The economic evidence suggests that increases in the minimum wage lead to slower job growth, particularly for young workers and in industries with a high proportion of low-paid staff.

Raising the lowest wages does not mean that employers simply have to, or will, just cut jobs or working hours to keep the wage bill constant. The evidence is clear that employers find a variety of solutions.  Firstly, they restrain pay growth for their better paid staff. Secondly, they increase prices to consumers. Thirdly, they improve productivity and get more out of each hour that they are paying for. And then they squeeze their profits. Through productivity gains, they either earn more revenue or cut the amount of labour they need.

Employers do not try to ‘keep the wage bill constant’. They try to make a profit on the labour they hire. If hiring an extra manager led to extra profits, it wouldn’t matter that doing so also increased the overall wage bill. A minimum wage imposes a price floor on labour, so any worker whose total productivity is less than the minimum wage floor represents a net loss to their employer – which a profit-maximising firm will respond to by firing the worker. It makes no difference whether or not that firm has ‘restrained pay growth’ for its other workers: if an employee is loss-making at the lowest wage a firm can pay them, a profit-maximising firm will fire them. (Or simply not hire additional workers who would be loss making on net.) Even if firms can only tell the average productivity of their workers, because of information problems, they will demand less labour in total.

On the possibility of raising prices to make the worker profitable, see the previous point: if demand for the service is price inelastic, this might work, but it’s quite a claim to say that this is the case for most minimum wage-supplied labour.

Wages are not the only cost of labour to firms, either. Firms may reduce costs in response to minimum wage increases by cutting back on perks like lunch breaks and sick leave, as Starbucks did after it agreed to pay additional corporation tax in 2012.

Increasing low pay has a limited impact on the overall costs of most businesses. In some sectors, very few earn less than the living wage, e.g only 6% in manufacturing. Even in hotels and catering, which is one of the biggest sector for the Minimum Wage, only 17% of jobs are below the living wage and raising the Minimum Wage to the Living Wage would only add 6% to the wage bill. This is the highest impact for any sector. More importantly, labour is only a proportion of all costs, e.g. 25-35% for restaurants.

Is a 2.1% increase in costs for labour-intensive firms not something to be concerned about? The fact that ‘most businesses’ would not be affected seems beside the point. (The reverse of this is true too: if Kirby’s other points were correct, would his suggested minimum wage hike be a bad idea because it would affect “only” 17% of workers?)

There is no real evidence of any minimum wages in the world adversely effecting employment levels.

This is totally wrong. In 2006 Neumark and Wascher reviewed over one hundred existing studies of the employment impact of the minimum wage. Of these, two-thirds showed a relatively consistent indication that minimum wage increases cause increases in unemployment. Of the thirty-three strongest studies, 85 per cent showed unemployment effects. And “when researchers focus on the least-skilled groups most likely to be adversely affected by minimum wages, the evidence for disemployment effects seems especially strong”.

Few people stay on low-wage jobs for their whole lives: minimum wage work is usually a stepping-stone to something better where employees can acquire human capital. There is evidence that suggests that minimum wages deter young workers from acquiring these skills that allow them to get better jobs in the long run. Note also that minimum wages have been used explicitly to kick away the ladder for minorities: by whites in pre-Apartheid South Africa; by anti-Hispanic campaigner Ron Unz in California; and by, er, Polly Toynbee in a recent Guardian column.

Tyler Cowen reminds us to make sure our views of sticky wages and minimum wages are consistent: if “worker-imposed minimum wages” (sticky wages) lead to unemployment, as most Keynesians (among others, including me) believe, why would “state-imposed minimum wages” not also do so? (“Have you no respect for the law (of demand)?”, asks Will Wilkinson.)

Given that we know that minimum wage increases usually cause some unemployment, why take this chance when we could just give money to poor people directly? As we’ve been saying for years, the difference between the current pre-tax minimum wage and the post-tax “living wage” is roughly as much as a minimum wage worker pays in income tax and national insurance: in other words, if that worker didn’t pay tax, they would be earning a living wage. It looks as if the personal allowance will soon rise to the minimum wage level, but the national insurance contribution threshold needs to rise too.

But let’s go even further: if we replaced the tax credit and welfare systems with a Negative Income Tax (or Basic Income – call it whatever you want), we would top-up the wages of low-paid workers directly. Jeremy Warner calls for this in the Telegraph today, and I outlined something similar a few weeks ago. Yes, I’d like all the standard supply-side deregulations as well, but a Negative Income Tax would act as an insurance policy against the potential down-sides of such deregulations, strengthening workers’ bargaining power and addressing the fears of those who worry that deregulations will hurt some workers.

I understand that many Conservatives are coming to see a minimum wage hike as a political ‘free lunch’ – a popular and surprising way of showing an interest in the welfare of the poor that does not affect the government’s balance sheet. I hope this is not true. Contrary to Kirby’s claims, there are good empirical and theoretical reasons to think that raising the floor on the price of labour will cause more unemployment. And unemployment destroys lives. There are lots of things we can and should do to help the poor right now. Raising the minimum wage isn't one of them.

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Blame the planning system for flood damage

Written by Whig | Friday 10 January 2014

Much of the coverage over recent winter flooding in the UK has focussed on immediate issues. The Prime Minister was given a grilling in Yalding over failures to restore power supplies. This neatly demonstrates our loss of the principle of subsidiarity - the PM is not, and should not, be responsible for power supplies, they are both beneath and outside his purview. If we expect our politicians to control such matters, they will, invariably with unintended and deleterious consequences. Such is the creeping collectivism evident in our society, it is no wonder we have such an over-mighty state.

Some debate has centred around whether flood defences are sufficient or whether future funding will be reduce - much of this is simply political point-scoring. Again, there is the question of whether the state should be responsible for such issues - if we worry about the state delivering insufficient supply, surely this is an argument for private supply? Further, how can we discern whether the state is, actually, over-supplying flood defences? Without a price mechanism in operation, there is no means to tell.

Subsequently, the debate seems to have shifted over to whether the floods are related to climate change. Without adopting any stance on climate change, it is 'bad science' to link such particular weather event to the phenomenon. Environment Secretary Owen Patterson has been castigated by the left-wing press for 'climate scepticism' - in reality his position of moderate, evidence-based scepticism (in the philosophical sense) seems far more reasonable than the PM's comments.

In reality, the floods demonstrate something quite different - the failure of planning policy. The problems have been caused not by the flooding itself, which is actually pretty common in winter, but increased levels of building in floodplains leading to - surprise, surprise - increased flooding. To quote the Chair of the Flood Protection Association '“It is absolutely barking mad to build on a flood plain when there are so many other places that could be built on.”

Why, therefore, is development taking place in such unsuitable locations? Step forward our old nemesis Planning Policy. Instead of allowing a sensible, functional market in land planning, which would factor in such costs and mitigate against such illogical development. Instead, the bureaucratic and public choice factors inherent in collectivised control of land use lead to such suboptimal outcomes - not only do we have grossly insufficient new housing we also have it poorly situated. Moreover, such policy further imposes costs - flooded voters demand flood defences, funded out of additional the tax system and with all the deadweight costs associated with bureaucratic management. This is a typical feature of most interventions - they create additional costs and unintended consequences.

What this does tell us about climate change is that government policy is a poor way to deal with its effects, but also may well worsen them. Central planning creates suboptimal choices and inflexibility. Dynamic phenomena such as environmental demand adaptability, entrepreurialism and efficient allocation of resources. Political and bureaucratic choices offer none of these. 

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Minimum alcohol pricing is an irredeemably stupid idea

Written by Tim Worstall | Friday 10 January 2014

Much fun and games as we here at the ASI are attacked in the pages of the British Medical Journal:

The opening public salvo of a concentrated lobbying offensive with the sole objective of killing off minimum unit pricing was a report published by the Adam Smith Institute on 26 November, two days before the consultation opened. The institute is a self appointed opponent of “big government . . . regulating businesses [and] interfering with lifestyle choices,” and has a long record of resisting regulation on behalf of the tobacco industry.16 17 For the institute, opposition to minimum pricing was a perfect fit, and its report, Minimal Evidence for Minimum Pricing, declared that predictions based on the Sheffield alcohol policy model were “entirely speculative and do not deserve the exalted status they have been afforded in the policy debate.”18

It is of course joyous that we here are able to get so far up the noses of these appalling little health fascists that they start to lash out in such a fashion. The authoer of that report, Chris Snowden, responds quite magnificently here. And Chris has shown that the original statistics used to justify the idea were wrong, that the plan won't actually do much if anything about the perceived problem being addressed and all in all it's simply a loss of freedom to no benefit whatsoever. It's also, as both Chris and I have pointed out over the years, illegal under EU law.

But I would go that one step further. It's also an irredeemably stupid idea. Even if we accept the evidence being proffered by the enthusiasts it is still entirely barking mad. For the effect of the plan, this minimum alcohol pricing, will be to increase the profits of those who make, market and sell cheaply made alcohol. Which is, as I hope all those with an IQ above their shoe size can see, not really the very bestest manner of reducing the incentives to make, market and sell cheaply made alcohol.

Let's just take as read everything those enthusiasts are telling us. That cheap booze kills, that we can reduce the number dying by making alcohol more expensive. OK. So, we have two ways of making booze cost more: we can have regulated (and high, as they demand) prices. Or we could raise the tax on booze.

The effects of high regulated prices are that the profit margins of those who make cheap booze rise. Because there is now no price competition in the retailing of the booze of course. Thus the makers of cider, the retailers of it, don't have to indulge in price cutting to compete their way into the shopping baskets of boozers. Thus we get high, and fixed, profit margins in the grotty booze business. Sure, volumes sold might fall but the margins on what is sold will be attractively eyewatering. This isn't notably a desirable outcome: recall, we're liberals so we're on the side of the consumers, not the producers.

Or we could raise taxes. We end up with the same prices as in option one. We end up with the same reduction in boozing, whatever that amount is. But we've not just fattened profit martgins for the producers. We've also raised cash money for the Treasury and can thus cut taxes elsewhere to compensate. Or, if you must, we can increase public spending or cut the national debt.

Option two is clearly and obviously the better one: and that is already assuming that we agree with everything else that the campaigners are suggesting. When we relax that assumption of course their case falls apart entirely but that's not what I'm trying to point out here.

What I am pointing out is that even by their own (paltry) standards of evidence and logic their plan for minimum alcohol pricing is still irredeemably stupid. And we're really not supposed to be basing public policy on such idiotic suggestions now, are we?

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The most appalling drivel from the New York Times

Written by Tim Worstall | Thursday 09 January 2014

This drivel from the New York Times is so bad that it's actually painful to read. It's following on from the paper's hit job on your friend and mine, Craig Pirrong. The argument is about how does, or how doesn't, speculation alter prices. And as I say this is so bad that it really is painful. I quote at length so you don't think I'm cheating or anything:

The academic debate about what role, if any, the surge of financial speculation played in the run-up of commodity prices during the past decade remains unresolved. It is generally accepted that the price increases were in large part caused by market fundamentals – increasing demand in China and other developing countries, currency fluctuations, the diversion of grains to biofuels. Numerous studies by economists find little evidence that speculation played a major role. Studies by other economists find that price increases and volatility were fueled, to a significant degree, by the vast amount of speculative money that has entered the market since the rise of investment funds — particularly index funds — that track commodities.

The task of definitively answering the question is complicated by the murkiness of the data. Most trading data is considered proprietary and is therefore not released to the public or researchers. The information released by federal regulators and the exchanges is often difficult to work with because it is aggregated in ways that make it tricky to separate investors speculating on where prices will go from those simply trying to hedge their risks. When the Commodity Futures Trading Commission gave researchers from Princeton and the University of Michigan access to actual trade data, the resulting study found evidence suggesting that financial speculation had played a role in price swings during certain time periods.

But before more studies could be done to test their findings, the C.F.T.C. research program was shut down because the Chicago Mercantile Exchange complained that a subsequent study, which was critical of high frequency trading, had improperly released confidential details about its clients. Outside of academia, many commodities traders, financial institutions and oil industry executives have asserted in recent years that speculation is a major factor behind rising prices and market volatility.

The public policy debate has also been moving toward more regulation to prevent any possible price impact of increased speculation in the future. In the United States, restrictions on speculation were included in the Dodd-Frank package of financial reforms in 2010. While those rules were blocked by a court challenge funded by the financial-services giants, the C.F.T.C. in November approved a new set of position limits that would curtail Wall Street speculation. — David Kocieniewski

This is just nonsense: the writer of a front page New York Times piece appears entirely ignorant of what he discusses.

Absolutely everyone agrees that speculation changes prices. No doubt about it whatsoever.

We're entirely certain that speculation in the market for physical goods changes the prices for physical goods. We're equally sure that speculation in futures and options changes the prices of futures and options. These aren't things up for discussion: they just are.

The actual subject under discussion is whether speculation in futures and options changes the underlying physicals prices. And the answer to that is, in the absence of changes in physical stocks, no. Even Paul Krugman of the New York Times agrees with that.

But this is the way that the public debate seems to be conducted these days. Read the extract again: at no point at all does the distinction between speculations in futures and options or speculations in physicals get mentioned. And it's precisely that this distinction is not made that allows the horrible mistakes. Including, obviously, the entirely untrue implication that futures speculation changes physicals prices and therefore we must regulate futures trading more.

If I thought these reporters were bright enough to recognise a bribe I'd assume they've taken one: given that I don't it must simply be that they do not understand the subject they are attempting to explain.

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Old Economy Steven would have been better off now

Written by Ben Southwood | Wednesday 08 January 2014

An interesting essay from Chris Maisano over at Jacobin Magazine drifts over many topics—full employment, growth since the 1970s and neoliberalism, worker activism and the 40-hour week. Its essential case is that full employment is important, because it makes workers better off in lots of ways, including giving them more leisure time. There are some interesting points in the piece, and I agree that full-ish employment is an important goal, but overall I think it rests on a huge number of misconceptions—indeed data is used in very weird ways, with what I see as obvious questions left entirely uninterrogated.

Maisano points to the "Old Economy Steven" meme, which looks back to an idealised post-war era:

Steven pays his yearly tuition at a state college—with his savings from his summer job! He graduates with a liberal arts degree—and actually finds suitable entry-level employment! ... But Steven doesn't just enjoy the material comforts of Old Economy abundance. He possesses a degree of everyday power scarcely imaginable by working people today. Steven can tell his boss to shove it, walk out and get hired at the factory across the street.

The contrast with popular views about today's economy, at least since the recession, is obvious. But full employment policies have been demoted—indeed since the late 1970s and especially since central bank independence most developed countries have centred their macroeconomic policies around stable inflation, not high employment. In fact, central banks now see a Non-Accelerating-Inflation Rate of Unemployment (NAIRU) as the optimal situation. But is this an "ideological response" as Maisano suggests?

There will always be some unemployment, from the numerous supply side restrictions on labour, and from job switching, especially with sectoral shifts. Inducing unexpected inflation can temporarily take unemployment below this "natural" level, for example through money illusion—where workers think nominal pay is actually real pay—but it is unsustainable. Once unions and individual workers compute this level of demand growth into their calculations the natural rate will return and the monetary authorities will need to push inflation yet higher to subvert this equilibrium.

Many economists, including Milton Friedman, argue that something like this caused the rampant, out of control inflation of the 1970s, something that was only reigned in by harsh recessions in both the UK and USA (attempting to control wages and prices was an abject failure everywhere). Acknowledging this means acknowledging that aiming for unemployment as close as possible to zero is a bad idea; it is better to aim for the lowest level of unemployment achievable without acceleration inflation. It's certainly possible to argue that monetary policymakers have failed to do this—but it hardly seems like a specifically ideological development, more like progress in economics.

A second sticking point is how growth has declined since neo-liberalism replaced the post-war consensus as the dominant political framework in at least the US and UK. This is true. But it's also true that every developed country saw a growth slowdown in the 80s and 90s relative to the post-war era. Economic historians are divided on the causes but since the most neo-liberal countries grew much faster than the more left-leaning states, one'd be hard placed to see that as a key cause. But even though growth has slowed down it has not stopped—and despite a few bumps we are much much richer today than in the 1970s. Just think, if had the opportunity to be whizzed to the 1970s to have the same standard of living as someone in your income percentile did then, would you?

My third disagreement is on hours worked. Maisano heavily implies that the consistently looser labour markets since the 1960s and 1970s have resulted in workers forced to work longer hours. He's clearly looked at the numbers, since he compares the US's average 1,778 in 2010 (1,742 on the FRED numbers I've seen) worked unfavourably to "continental European and the Scandinavian social democracies". But is that a germane comparison? To me it seems like the best way to compare the wellbeing of workers now, following decades of neo-liberalism and below-full-employment, and workers then, is to directly compare them. On average, during the 1970s, an employed person worked 1,859 hours (in 1970 it was 1,912 hours), in the ten years up to and including 2011 the average was 1,772.9. Maybe Maisano believes that with a greater focus on full employment incomes would have grown even more and hours would have fallen even faster—but if he thought that maybe he should say it.

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A sensible Tobin Tax

Written by Tim Worstall | Wednesday 08 January 2014

This might come as something of a surprise but there is, out there in the real world, a proposal to have a sensible Tobin Tax. As opposed to the deeply not sensible Tobin Tax as supported by the Robin Hood Tax campaign. That's a financial transactions tax which would be a completely appalling idea. The sensible one is in fact from China:

Britain’s bid to become a global hub for trading in Chinese assets has run into a major snag after a top Chinese official suggested a ‘Tobin Tax’, a levy on financial transactions to curb capital flows. Yi Gang, director of the State Administration of Foreign Exchange, called for an “in-depth study” of a Tobin tax, particularly on foreign exchange trades and flows of speculative hot money. SAFE is the world’s biggest fund, commanding the central bank’s $3.7 trillion in foreign reserves. ..... Mr Li, who is also deputy chief of China’s central bank, wrote in the Communist Party journal Qiushi that curbs may be needed to ensure an “orderly” transition as the country opens up its internal capital markets and moves towards a free float for the yuan.

It's worth recalling what Tobin himself actually advocated. Back at the end of the fixed exchange rate system known as Bretton Woods he wanted to increase the power of governments over markets. To do so he advocated a small tax on all foreign currency transactions. This would slow down, or reduce, the amount of money washing through the echanges and thus make it easier for central banks to manipulate the exchange rates. He saw this as a good thing, we now do not, therefore we're not in favour of such taxation.

However, there is still a place for such taxation: no, not such a tax to be imposed on our now free markets in currency (or anything else) but as a stage to be gone through when moving from a near entirely non-market system to a free market one. And it's in that context that China is suggesting one on their currency, the yuan. The liberalisation of such a market is a good idea, obviously. But there's very definitely an element of not quite wanting to go to complete and total liberalisation in one fell swoop. There's a good 70 years of economic mismanagement there to overcome and the shockwaves of an immediate and pure free market would be considerable. Not a bad idea at all to take it step by step.

The real problem with this of course will be that those Robin Hood, the FTT, people will say that if it's OK for China to have a Tobin Tax then why wouldn't it be a good idea for us to have one? The answer being that China having one is part of the transition from a rigged market to a free one: our having one would be an entirely unwelcome move back in the other direction.

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