Blog RSS

The Pin Factory Blog

"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

Bank bonuses and bogus arguments

Written by Dr. Eamonn Butler | Wednesday 15 January 2014

Here I go again, defending bankers. It's a dirty job, but someone has to do it. Well, it's more than a hobby than a job because the banks don't even pay me to do it.

It's bonus time once more, that time of year when the unpleasant politics of envy erupts after the peace and goodwill of the holiday season. This time, RBS wants to pay bonuses more than 200% of staff salaries. That of course requires the permission of its shareholders – principally, the UK Government in the form of Chancellor George Osborne. Such bonuses are "inappropriate" say many political critics, particularly when "ordinary families are struggling with the cost of living."

But bonuses are a very sensible way to pay people in a volatile sector. In an economy that is growing, as the UK's is now, banking business is great. There are company mergers and acquisitions to do, investments to be placed, and all the rest. In a stuttering economy, business is disastrous. So banks have a system that rewards key people on the basis of results. That is a lot better than scrapping bonuses, raising salaries instead (which is what would happen), and then having to lay people off (and lose their expertise) where you hit a rough patch. With a bonus system, you just pay them less and they hang on, in the hope and expectation that things will improve.

It should not be up to MPs – and MEPs in Brussels, Strasbourg, or wherever they have decanted to this week – to decide how much bankers should be paid. They are hardly icons of virtue on the pay and expenses front themselves. Most of them don't even understand the sector. If bonus caps are to "reduce risk taking", then why did MEPs cap fund managers, who don't take anything like the risks that bankers do.

Bank bonuses are already heavily restricted. Rules introduced in 2010 cut the amount that could be paid in cash, and spread the pay-out time over 3-5 years. So people today get more of their bonus in shares - which means that the long-term health of their company is dearer to their hearts than any one-off "quick profit."

Let us not forget that after New York, London is the world's leading services centre. The sector brings in about £60bn in tax every year, more than 10% of the government's entire budget. We need it to succeed, and retain talent – which means paying them world market rates. That's what we do with footballers – John Terry is paid £6.7m a year, Wayne Rooney is on £15.1m and Steven Gerrard picks up £7.2m and got an MBE too. But football clubs are very small businesses compared to banks. Though a world footballing brand, Manchester United's capitalization is just £2.47bn; the market capitalization of RBS is seventeen times bigger, at £41.8bn. Should we be surprised if star performers in RBS are paid seventeen times what Rooney earns? But in fact we baulk when they are paid fifteen times less.

There is a problem with banking, but it is not bonuses. It is the lack of competition. The main UK banks can literally be counted on one hand: HSBC, Lloyds (which includes Bank of Scotland), RBS (which inlcudes NatWest), Barclays and Standard Chartered - though the latter operates mainly overseas. Lack of competition means customers get a worse service at a higher price, and providers can indeed overpay themselves. In a competitive market, anyone over-rewarding their staff would go out of business. So let's not try to guess what the "right" remuneration is for bankers. Let's open the sector to competition – which means scaling back the regulation on new entrants – and let the market do the job for us.

View comments

Low rates doesn't mean low rates

Written by Ben Southwood | Wednesday 15 January 2014

I got called up last Wednesday to ask if anyone at the Adam Smith Institute would go on the Daily Politics to explain why the Bank of England should raise its base rate (not exactly in those words). The producer was familiar with common free market ideas that argue that artificially low interest rates are blowing up a housing bubble which will later burst. I had to try to explain to the producer why I both agree and disagree with these sentiments: low interest rates do underlie economic limbo, but raising the base rate is not a solution and may produce yet lower real interest rates where it matters—throughout the economy.

The problem comes from the dual use, in the popular economic press, and even by top economists, of the term "interest rates" to mean both the stance of monetary policy and the cost of borrowing. This is understandable because during the Great Moderation of 1992-2008 all the world's most important macroeconomic authorities attempted to control the overall economy through adjusting one or a small number of key interest rates to achieve a consumer price inflation (CPI) target. At the same time, we are familiar with interest rates through our normal life: on loans, mortgages, savings, credit cards and so on. But acting as though the Bank of England directly controls these rates when it adjusts policy seriously obfuscates how the macroeconomy works and contributes to a lot of sloppy thinking.

Whereas the Federal Reserve has always used a form of quantitative easing (QE) to adjust a market interest rate—the Federal Funds Rate—the Bank of England has typically adjusted its base rate, which it calls Bank Rate, instead (updated). Bank Rate is the flat (nominal) interest rate it charges commercial banks for short term funding, and pays on their excess reserves. This sets a lower bound on overnight commercial lending, since it is always an option to lend or borrow money at Bank Rate, and therefore it is included in some market contracts, like tracker variable rate mortgages. The current UK base rate is 0.5%, a nominal number which translates to a negative real rate, but secured loans charge more like 3% in nominal terms, unsecured loans 8%, and credit cards 10%.

So we've established that the Bank of England sets a lower bound on interest rates with its Bank Rate. And we've also established that Bank Rate affects some other rates directly, principally tracker mortgages. We might also expect it to affect other rates in the economy—for example a cut will "ripple out" through the economy, because all other things being equal, it is now cheaper for banks to borrow from the BoE and they will thus be more willing to do so. Economists call this the liquidity effect. They will thus be more willing to lend cheaply and less willing to borrow from savers. So one effect of lowering the Bank Rate is to directly lower some rates, put a lower lower bound on others, and make others cheaper.

However there is an opposed reaction. Lowering Bank Rate doesn't just make loans cheaper, but it increases demand. It does so by injecting extra money into the economy (from the extra loans), but more importantly by signalling to markets that it intends demand to grow faster and that it is willing to take measures (such as further lowering Bank Rate or boosting the money supply through a QE programme) to make sure this happens. This is why stock markets react so strongly to a (policy) interest rate cut—all businesses are worth a bit more because they expect higher total revenues over their future.

But if firms expect higher demand in the future they will in turn demand more investment funds to put into projects to service that demand. This means that cutting the BoE's base rate puts pressure on effective market interest rates in both directions. It is an empirical question which direction the overall effect goes in—but this means that the simple coincidence of low real effective interest rates out in the economy and a low, by historical terms, Bank Rate, shows nothing. It could be that the best way to raise interest rates out there in the economy is to cut the Bank's base rate, or, since it can't go much further now, print money to raise inflation (which would ceteris paribus cut the rate in real terms). Look at the graph above for an illustration of how the Fed's changes in their QE programme (the red line) and their Federal Funds rate (the dark blue line) don't produce big shifts in (real) market interest rates like corporate bond returns and 30-year mortgages.

So my view on low interest rates is complicated. I think the Bank should get out of the business of setting rates altogether, and vary the size of the monetary base to control nominal income in the economy. But if the Bank is going to use rates as its key policy tool, it shouldn't raise them when a recovery hasn't quite taken hold—it's uncertain whether it'll raise market interest rates, but it will certainly choke off the demand we need for solid growth.

View comments

I do wish that people would make up their minds and be consistent

Written by Tim Worstall | Wednesday 15 January 2014

Yes, I know, forlon hope given the combination of politics and non-godly religion here, but I do wish that people would be consistent. Given the announcement over the taxation of fracking we're getting the usual complaints from the usual people:

The government also came forward with a proposal to turn more of the tax revenue from fracking over to the communities where the wells would be. Friends of the Earth dismissed the tax proposal as "a new low" and likened it to paying off local councils to sign off on drilling permits. But there's nothing underhanded about the idea, which would have councils retain 100% of the property tax paid by businesses to support local services.

I'm old enough to recall when business rates were indeed paid to local councils and there was great lefty hysteria when it was decided that they should be centrally allocated instead. So I'm a little confused about the same sort of people now shouting that local taxation to pay for local things is a bad idea.

There's also been outrage at the idea that fracking fields should pay lower corporation tax rates (in reality, lower royalties but they're assessed as corp tax) than North Sea fields. Yet this criticism is coming from exactly the same people who insist, very loudly and at length, that it is the duty of government to support and even subsidise nascent industries. I don't mean just renewables here either: I mean the whole encouragement, protection and coddling of infant industries. It is exactly those who support such ideas who are now screaming about the government encouraging such an infant industry merely by the expedient of not taxing the snot out of it.

Which is what brings me to my wish: that people will at least be consistent in their ideas and approaches. For we do need to have an attitude towards governmental subsidy and encouragement which is more sophisticated than merely to provide them for things I like and don't for things I don't.

View comments

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.

View comments

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?

View comments

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.

View comments

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.

View comments

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.

View comments

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. 

View comments

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?

View comments


About the Institute

The Adam Smith Institute is the UK’s leading libertarian think tank...

Read more