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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

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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The effects of abolishing corporation tax

Written by Tim Worstall | Tuesday 07 January 2014

As you all know I'm a great believer in pushing that corporation tax rate right down to zero. In simply abolishing the tax in all its forms. One of the arguments against this is that, well, whadda about the revenue to pay for schoolsnospitalsncouncilouses? And the thing is, I'm not entirely sure that there's actually all that much revenue in corporation tax. Here's a prediction about dividends for this coming year:

Stock market investors are in line for windfalls after research showed that Britain’s biggest companies are expected to pay out a combined £72.4bn in ordinary dividends this year. Businesses listed in London’s benchmark FTSE 100 and mid-cap FTSE 250 will lift their dividends for the current financial year by 4.5pc, according to financial data firm Markit. The total payout is expected to rise to £89.3bn once special dividends, including Vodafone’s $23.9bn (£14.6bn) shareholder reward, are taken into account.

Note that this is only listed companies, this does not include any private companies paying dividends: something which a lot of them do of course. That £80 billion odd has already paid corporation tax at what, 25% say? Do note that most of the dodges about corporation tax fail when it comes to money available to pay dividends: all that offshore stuff just doesn't work. So, given that the £80 billion is a net figure, add in a bit for private companies and we could guess that perhaps £30 billion, £35 billion has been paid in corporation tax upon these dividends. The recipients of those dividends then get a tax credit on what has been paid already (higher rate taxpayers have to cough up more).

Over here we've got the total recepits for corporation tax:

Comparing the last two years available, total CT liabilities were broadly equal, rising by one percent to £43.8 billion in 2011-12, from £43.2 billion in 2010-11.

And some £9 billion of that was the offshore oil and gas sector. Which isn't, really, corporation tax that's a tax on the Ricardian Rent of the oil being found under British waters. Something that should most certainly continue.

£44 billion minus £9 billion in Ricardian taxation gives us pretty close to that £30 - £35 billion which is simply the advance taxation paid upon those dividends. And it really makes no difference at all whether we tax that at the level of the dividend recipient or the company.

All of which means that if we were to abolish corporation tax and then tax dividends simply as the income they are then there wouldn't actually be much difference in revenues to pay for the schoolsnospitalsncouncilouses.

Agreed, this is very much back of the fag paper stuff and I'm sure that other people have more accurate information on this. But wouldn't it be wonderful to be able to simply abolish a tax without any great effect upon the public revnues? Oh, and with the effect of no company ever again being able to do any tax dodging at all as there would be no tax for them to dodge? Plus all those accountants and lawyers have to go off and do something productive.

I like it as a plan. So where and why am I wrong here?

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The twelve days of state bureaucracy: 8-12

Written by Dr Eamonn Butler | Monday 06 January 2014

Day 8

Dearest Grandmama, eight noise abatement officers arrived saying that the noise of my neighbours' protest and the various inspectors' cars coming and going was in clear breach of official guidelines. They served me a compliance notice. I will write more tomorrow.

Day 9

Dearest Grandmama, the au pair and I made the mistake of bringing out tea and cakes in an attempt to make peace with the neighbours, it is the season of good will, after all. Now nine food safety inspectors are here, saying that out kitchen does not comply with hygiene regulations for the provision of food to the public. I will write more tomorrow.

Day 10

Dearest Grandmama, ten Home Office people broke down the door today, saying they suspected that the au pair might have been working here illegally. I've spoken to a lawyer and we hope we can get her out of the detention centre soon. We had the workmen come back to repair and repaint the front door. I will write more tomorrow.

Day 11

Dearest Grandmama, eleven EU inspectors arrived today. We convinced them the au pair was Bulgarian and therefore had a perfect right to be working here, but one of them noticed the name of the house and told us that we had to change it from Green Acres to Green Hectares. They also quizzed us on what colour the front door had been painted. I will write more tomorrow.

Day 12

Dearest Grandmama, today twelve court officers turned up to serve me with a European Arrest Warrant. We had been reported for painting the front door in a colour called Burgundy Red, Unfortunately this name breaches of EU local origin protection regulations. Anyway, I'm in prison myself now in Burgundy, and will have to sell the house, including the partridge and the pear tree, to pay my legal bills.

Still, it was a very kind gift, and at least it has taught me a lot about regulation these days. Please address any future correspondence to my lawyer.

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Bitcoin is a win-win for liberty

Written by Preston Byrne | Monday 06 January 2014

Depending on who you ask, cryptocurrency is either: (1) the future or (2) stupidity.

Some early adopters claim that 1 BTC could reach $40,000; others ask whether BTC will become “Gold 2.0”.

The ASI's own Tim Worstall (among others) disagrees, pointing to the fact that a cryptocurrency can effectively be created out of thin air—“with no scarcity comes no value”—and likens BTC, whose rivals (wow) multiply, as akin to that of “the Golgafrinchan B Ark using leaves as money. They...have to burn down the forest to stop inflation.”

This view is wrong. Cryptocurrency is not presently scarce: there are perhaps hundreds of cryptocurrencies with active userbases, many of which are actively traded. Yet despite being functionally identical to BTC some are near-worthless (1 DOGE = $0.00035) while others are prized (1 LTC = $24.00). Why, then, is 1 BTC worth $760?

The answer, of course, is that cryptocurrencies aren't money, but rather “more of a payment system like Visa than a currency like the dollar,” and ones with some unique characteristics at that: low transaction costs, increased anonymity, and a distributed network architecture. This alone has value.

BTC also benefits from its “first-mover status (which) grants it some advantage over its competitors in the form of network effects,” with its value deriving, “at least in part, on the number of other users willing to transact.” (Luther, 2013).

In this respect its lead is commanding. As for its closest analogue, credit cards, network effects in respect of these have resulted in there being “only three major credit card companies in the world… (and as such) cryptocurrency network externalities are likely to be high.” Though cryptocoins are obscenely easy to mint, the dominance of a few large players will mean joke currencies become increasingly difficult to trade.

As yet, cryptocommerce has only been adopted by small, distinct groups of individuals (libertarians, internet denizens, and black marketeers (Luther, op. cit.)). For each of the above, crypto serves a distinct purpose and success or failure has a distinct meaning. For those who see crypto as a creature of politics (as I do), at this early stage, it should not matter what a particular cryptocurrency is worth from time-to-time. It matters only that a few are (1) capable of holding value and (2) are actually used.

The value of the eventual frontrunners will undoubtedly bear a relationship to black market demand – as put by one commentator, “if Bitcoin succeeds, it will be because of the War on Drugs and other policies that increase demand for a quasi-anonymous, internet-transportable currency,” exactly the kind of disruptive function the crypto-anarchist manifesto predicted in 1988.

Crypto therefore presents states with a dilemma: repress it, or compete against it. Choose the former, and cryptocurrency will serve as a check on state power. Choose the latter, and it will have been a powerful catalyst for reform.

Either way, liberty wins.

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Apparently I'm a hyper-neoliberal

Written by Tim Worstall | Monday 06 January 2014

It rather surprised me, last week, that I was described by an American magazine editor as a "hyper-neoliberal". I'm really not quite sure what that means but I assume it's because I agree with points like this:

PLAN A The government subsidizes the incomes of low-wage workers. These subsidies are financed by increasing taxes on middle- and upper-income Americans.

PLAN B The government again subsidizes the incomes of low-wage workers. But under this plan, the subsidies are financed by taxing those companies that hire low-wage workers.

This is Greg Mankiw discussing the difference between raising the incomes of the working poor through some form of public payment (ie, tax credits, the EITC, whatever) and a rise in the minimum wage.

To be sure, the minimum wage isn’t exactly a system of taxes and subsidies. But its effects are much the same as those of Plan B. Unskilled workers earn more, and the businesses that hire them pay more. The main difference between the minimum wage and Plan B is that, under a minimum wage, the extra compensation is paid directly from the business to the worker, rather than indirectly via the government.

And for me this is the clinching point:

First, fairness: If we decide as a nation that we want to augment the income of low-wage workers, it seems only right that we all share that responsibility. Plan A does that. By contrast, Plan B concentrates the cost of the wage subsidy on a small subset of businesses and their customers. There is no good reason this group has a special obligation to help those in need.

I've said this a number of times before and it still remains true. There is indeed the market price of whatever it is, in this case low skilled labour. And it's entirely possible that we, as a society, communally, decide that we don't like that price. Say we think that the price of cigarettes is "too low" (leave aside how we determine too low or too high here). We tax them and that tax benefits us all in that all of us share in the public goods financed by that tax.

We might also decide that the price of low skilled labour is too low. We desire it to be higher. Precisely because it is all of us making that decision (again, leave aside concerns about majoritarian tyranny here) therefore it should and must be all of us dipping into our pockets to pay for it. We should no more insist that investors in the sort of business that employs low wage workers pays that extra wage that we desire than we should insist that smokers, or tobacco companies, get that extra tax raised as we fix that too low price of ciggies.

They're societal interventions thus it must be society that pays or collects on them.

Whether we should have a wages top up, or taxes on ciggies, is entirely another argument. This logic, assuming that we're going to have them, still stands. Societal decisions need to be paid for by society, not by some subset who can be stuck with the costs of our desires.

In this analysis I am joined, as above, by Greg Manikiw, ex-head of the Council of Economic Advisors, economic advisor to Mitt Romney (about as wet a Republican candidate as we've seen in many a decade) and also by the UK's only thinking Marxist, Chris Dillow.

And for thinking this way I am called a "hyper-neoliberal" by an American magazine editor. I still don't quite know what that phrase means but I think it's more a commentary on the political inclinations of the US journalistic caste than it is about me or the real world.

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