The Pin Factory Blog

As Ella sang a number of times.....

Electric eels I might add do it
Though it shocks em I know
Why ask if shad do it - Waiter bring me
"shad roe"

In shallow shoals English soles do it
Goldfish in the privacy of bowls do it
Let's do it, let's do some trade

Yes, apologies, that last line shows why I'm writing blog posts not lyrics. Ahem.

The great argument deployed to justify government regulation of voluntary exchange is that we're all feeble minded idiots who'll get ripped off by nasty people. We have to be limited in what we can do for our own good. That definition of "our own good" and what limits there will be being decided by people on nice salaries in lovely offices on final salary pension schemes paid for by us of course. For our own good.

However, the failure of this argument is that such regulation is not the only method possible of punishing the bad guys. Most of life is a repeat game, we're interacting with very much the same people multiple times. And it's not just humans who know how to do that either:

Beneath your feet, plants and fungi are exchanging nutrients in a marketplace where generosity is rewarded and cheating punished. The two kingdoms were known to exchange nutrients at root level – now, researchers have shown that they have evolved ways to enforce fair trading.

All without a bureaucrat or regulation in sight, mindless plants and fungi are capable of playing repeat games, regarding good and desired supply, punishing cheaters and enforcing fair trade.

So my suggestion is that we get our own mindless plants and fungi out of their offices, strip them of their nice salaries and pensions and burn their regulations on how we may conduct voluntary exchange. For I'm pretty certain that we can manage to outperform Medicago truncatula even if the newly unemployed bureaucrats will find it difficult to beat mycorrhizal fungi.   

An interesting new paper from Peter Diamond and Emmanuel Saez, trying to calculate what would be the optimal top tax rate to have in a progressive income tax system. Worth taking seriously as one has a Nobel and the second is tipped to be an obvious choice in years to come.

The things that need to be balanced are that the poor like an extra £ of redistribution more than the rich hate losing an extra £ to taxation and there will be behavioural changes as a result of changes in taxation rates. So, the calculation is really, what's the top rate at which we can snaffle as much as we can off the rich to give to the poor without killing that rich goose that lays those golden eggs?

The answer?

As an illustration using the different elasticity estimates of Gruber and Saez (2002) for high income earners mentioned above, the optimal top tax rate using the current taxable income base (and ignoring tax externalities) would be *=1/(1+1.5 x 0.57)=54 percent while the optimal top tax rate using a broader income base with no deductions would be *=1/(1+1.5 x 0.17)=80 percent.

You can just see it now, can't you? Whoopee! Tax the rich more!

Well, actually, this research was done for the US but let's apply it to the UK. This is the top tax rate for the top 1% as well: roughly those who currently pay the 50% income tax rate in the UK situation. It's also not the income tax rate. It's the total marginal tax rate: so we must include national insurance as well, that 13.8% that employers nominally but workers actually pay at such income levels.

So, we've firstly got evidence that the 50 % income tax rate in the UK is above the optimal level for that with the NI takes us well over our calculated to be optimal level of 54%. We'd need to have a top income tax rate of some 42, 43%, for the total marginal rate to be at that optimal 54%.

So, this is good, isn't it? Cut taxes now!

There's also a much more important difference that we should note between the US and UK tax systems. A US citizen is taxed on global income in the US. If they leave the country they still pay US taxes (with a large tax free allowance, with credits for foreign taxes paid). So the only possible behavioural response for a US citizen to such high tax rates is to just earn less money.

For a UK citizen of course this is not true. We can work less, take more leisure, if we think the Treasury is taking too much off us, just as can the American. But we can also leave. In fact, we're signed up to the EU which guarantees that we can move. Also, it guarantees that you cannot discriminate between EU citizens on the basis of national origin. So a Brit living in France would pay tax just like anyone else living in France: it would not be possible for the UK Treasury to insist that income made outside the UK were to be taxed at some special UK citizen only rate.

This escape hatch means that the optimal top rates decline: by quite how much no one as yet knows but it is obvious that they do decline.

So this is even better. We need to really cut taxes now!

And as to that mooted 80% top marginal rate? If we had a broader tax base and no deductions? That ability to bugger off and thumb ones' nose at the Treasury still applies. Meaning that the up to date research from two of the world's finer economists tells us that UK income tax rates are too high.

As, of course, we here at the ASI have been telling you for decades.

I'm told that not only is Tim Cook gay but also that this is something very important which should be emblazoned across the newspapers of the world.

 Tim Cook is now the most powerful gay man in the world. This is newsworthy, no? But you won’t find it reported in any legacy/mainstream outlet.

Well, no, it's not newsworthy and it's this glorious freedom of the market system which makes it not so.

Part of my family comes from Northern Ireland, where you can see what an economy built around close obligations and direct mutual exchange looks like. From the main square you'll have one street leading off to the Protestant church, another to the Catholic. Lining the streets to those respective houses of worship will be the Catholic pubs, the Catholic greengrocer, the Catholic butcher and on the other street the Protestant same. Great grandfather owned the post office licence in such a village and when partition came he advised his children to leave the country. For the money maker, that PO licence, would not remain with the family. Not with a Catholic in a new Protestant ruled state.

That is what happens when we have an economy which takes note of who you are rather than what you can do, when the economy gets caught up in the mutual hatreds and recriminations of small town life. However, we can and have escaped that. We escaped precisely by moving to the impersonality of the global marketplace. I don't care that the CEO of the company I don't buy my computers from is gay, any more than I care that the chips in my phone are made by a Hindu, Musselman or Chinee, that my vegetables are supplied by a Protestant or Catholic or that the server upon which these words reside is in the UK or Poland.

This is the huge great joy of the impersonality, the amorality, of the market. I no more need to care about the sexuality of who makes my computers than he does of my sexuality (middle aged and declining, thanks for asking).

It is of course true that it wasn't all that many years ago that this was not true: those outside the mainstream culture (and it extended to much more than just same sex attraction) were excluded: at times from employment at at others even from the joys of consumption. Which is why Mr. Cook's sexual preferences simply aren't newsworthy. Society has gone through a large and at times painful change to make these sorts of things just not newsworthy: let's keep it that way, eh?

People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public – Adam Smith

As usual, Adam Smith was right. Today I can think of no trade about which the above is more true than the medical profession. I don’t just mean doctors’ use of occupational licensure laws to keep their prices artificially inflated. Politically active groups of doctors are possibly the greatest single threat to personal freedom that there is in the UK today. Their motivation isn't necessarily their wallets, but their egos. Bullies like to use the state to push people around so they feel powerful.

There’s a sad example of this in today’s call in the Lancet, a medical journal that is often used as a political mouthpiece by campaigning doctors, for the government to introduce a “fat tax” to curb obesity.

Of course, the proposal is utterly specious. It's pretty dubious whether the "obesity epidemic" claims are true or not. And which diet plan should be implemented? Is it bacon, sugar, bread or something else that makes us fat? Will political parties of this fat tax utopian future be divided between the Low-Carb Party and the Low-Fat Party? And what if fat people's early mortality rates mean that they actually save the government money in pension and care home bills?

The doctors err even by their own logic. As Will Wilkinson has pointed out, if fat taxers thought things through, they would favour a tax on fat people themselves, not on the food they eat. Taxing food punishes people who exercise so that they can enjoy Big Macs, but not people who are so lazy that they balloon out while eating a balanced diet.

The justification for pushing people around like this is the NHS. Shouldn’t people have to pay for their own illnesses? Well, yes – that’s how personal responsibility works. But having an NHS removes the personal responsibility, and artificial attempts to inject it into the system are doubly illiberal and wrong.

The government (and the electorate, for that matter) forces people to be in the NHS. You have no choice in the matter, and you can’t opt out of it. Jamie Whyte put it well: "first the do-gooders conjure up the external costs by insisting that no one should have to pay for his own medical care, then they tell us that they must interfere with behavior that damages our health because it imposes costs on others." This is perverse and illiberal. The tax would only affect the poor – rich people's spending habits wouldn't be dented. How easy it must be for doctors to pontificate about the need for a fat tax, knowing that such a tax would hardly affect them at all.

This creepy, controlling paternalism has plenty of fans in politics on both sides of the partisan divide. Doctors are the politicians' enablers, lending the weight of their “expertise” to the nanny instinct of the political class in exchange for the feeling of being important. No amount of expertise – medical or otherwise – should give somebody the right to interfere with another adult’s choices. Nor should democracy be used as an excuse to violate the sovereignty of the individual. If fat people are costing the NHS money, that's a mark against having an NHS, not against having fat people.

Mark Pennington has a good post today on the Pileus blog on urban planning. Although the “public interest” is usually invoked to justify planning laws, he says, they actually have the effect of protecting the rich (who are effective at lobbying politicians) at the expense of the poor (who aren’t):

Urban planning has often prevented low income people from accessing housing in suburban and semi-rural areas where new and better paying jobs have been created. The primary culprit here has been restrictive zoning regulation – and in the British context the creation of development free ‘green belts’ around major towns and cities (now imitated by some US cities such as Portland).

The effect of these controls has been to restrict the supply of land for housing forcing up the price well above free market levels. The major beneficiaries are of course existing home-owners in areas of high housing demand who benefit from increased property values and who use land use regulation to keep out ‘less desirable’ residents.

In the hands of those who know how to use it, the state is a weapon. Planning laws are a good example of its subtle use by powerful interest groups. They effectively control the supply of desirable property, so that the owners of those properties can earn monopolistic profits. As with the barrier-to-entry laws that protect established corporations, planning laws protect property owners.

This is not to say that there should be no controls on urban planning, says Mark. But it may be that private, contract-based controls are more effective than state controls in getting people what they want:

If we want to protect open spaces and other environmental assets then land use regulation has a role to play – but much of this can be provided privately and need not operate in a zero-sum manner. Homebuyers who value open space protection and other environmental controls, for example, may purchase developments with restrictive covenants or contract into private communities which impose land use restrictions on plots within their domains in order to maintain neighbourhood integrity. . . .

All the evidence suggests that the demand for environmental protection is closely related to income. The rich and the middle classes have a stronger preference for land use controls than the poor. What state enforced, as opposed to private urban planning enables them to do, however, is to secure access to environmental quality ‘on the cheap’ and to do so at the direct expense of lower income groups.

This point cannot be underlined enough. As desirable as certain urban planning rules may be – height restrictions to allow more sunlight in residential areas, say – they have an opportunity cost and are often unjustifiable if that cost pushes housing out of the reach of poor people.

I recommend the whole piece, where Mark explains the public choice roots of Britain’s planning laws. The squeaky wheel gets the grease, but it isn't always the one that needs it.

Britain’s international aid budget costs the equivalent of 22 days of national borrowing from international markets. By 2015, British Aid will have increased by 34.2% to £11.5 billion per annum. Including personal donations and state spending, Britain gives 0.8% of GDP in international aid. With state aid increasing, more people should ask: Why are average per capita incomes in Africa lower than 40 years ago after $1 trillion of aid being given over that period?

Aid infrastructure is somewhat responsible. British charities usually attempt to limit net administration costs to 10% (though they often exceed these targets). Reports from the World Bank and ActionAid respectively estimate that 40%-60% of international aid budgets are spent on consultants. Government bureaucracy diverts 5% of British, and 8.7% of European aid budgets respectively.

Most historical evidence shows that developing world aid recipients are more debt-laden, inflation-prone and likely to experience conflict and corruption. In Afghanistan, DfID was forced to stop aid-money after US intelligence found that £1 billion went missing through institutionalised corruption. Malawi’s president, the recipient of £93 million of direct aid, recently ordered an £8 million presidential jet.

President Kagame, recipient of £83 million of direct aid, recently purchased presidential jets worth £60 million. International aid has also contributed to Rwanda’s conflict with neighbouring Congo (in which 5 million people were killed) and prolonged Rwanda’s genocide. When $1.5 billion was donated to deal with a cholera epidemic in Rwanda, Hutu militias stole 60% to fund their crimes.

The Horn of Africa crisis owes some origins to international aid. In 1980s Ethiopia, £90 million of aid was used to lure starving villagers into state camps, from where 600,000 were deported and at least 100,000 died. Using British and Russian aid, Somalia embarked upon a territorial conflict with Ethiopia, which neither nation could afford. Today, warlords rule most of Somalia, expropriating up to 80% of aid that goes there.

The great paradox of international aid is that resources meant to alleviate humanitarian suffering often perpetuate it. Western living standards can only be exported through free trade and more open migration laws.

Free trade gives poorer countries a competitive advantage to exploit, so they can trade their way to prosperity. Instead of giving dictators money to disperse, enterprising citizens earn the money themselves. Governments can still rob their people, but have to allow at least some commerce to take place to do so.

As Sam has argued, more open immigration rules in the West would allow developing nations’ inhabitants to learn from and experience Western market practices. Along with their earnings, they can return these ideas back to their home countries (where trading opportunities would encourage growth). Meanwhile, Western nations would benefit from better growth and higher tax revenues. Peaceful economic exchange would be a lot better for everyone than paying warlords and dictators to oppress their own people.

Hat-tip to Peter, whose comment on my blog 'Looters' brought this picture to my attention.