An excellent point about free trade

From Don Boudreaux's quotation of the day series:

After 1860 only a few import duties remained, and those were exclusively for revenue on such non-British commodities as brandy, wine, tobacco, coffee, tea, and pepper. In fact, although most tariffs were eliminated altogether and the rates of duty on all others were reduced, the increase in total trade was such that customs revenue in 1860 was actually greater than that of 1842.

Another spotting of the Laffer Curve in the wild there of course.

But it's worth noting that tariff changes weren't the only thing going on at this time. There was also a quite radical change in shipping technology: we were at the beginning of the steam age here. As another example, after the US Civil War there tariffs pretty much doubled: but the prices of imported goods fell. For we need to remind ourselves that the full cost of trade protection is the artificial barriers of the tariffs, the non-tariff barriers from bureaucracy (famously, Mitterand only allowed VCR imports through one French port with only three customs inspectors) and the transport costs. For the US the fall in late Victorian shipping costs was greater than that rise in tarrifs.

And we can also use this to explain a part of our modern world. Yes, it's great that tariffs have come down in this post-war period. But this is also the time of the shipping container: 30 tonnes of pretty much anything can be moved pretty much anywhere for under $5,000 these days. International trade would have increased massively even if tariffs had stayed at their old rate.

And this leads us to a point that those who promote infant industry protection need to face: the tariff levels you would need to be able to successfully protect local industry would be so high as to probably not be politically possible.

Immigration controls are the new Corn Laws. Why don't more free marketeers care?

If you had to name a single government policy that ruins the greatest number of lives, what would you pick? The 45p tax rate? Saver-hurting inflation? Green energy subsidies?

I’d say that the biggest one is the one that free marketeers are largely silent about: migration controls.

In 2011 Michael Clemens looked at the economic estimates of the global GDP growth that would come if every country in the world abolished restrictions on the movement of goods, capital and labour across national borders. According to the papers Clemens looked at, removing all barriers to trade would increase global GDP by between 0.3% and 4.1%; removing all barriers to capital flows by between 0.1% and 1.7%. Those are big gains that would make the world a substantially richer place.

Completely removing barriers to migration, though, could increase global GDP by between 67% and 147.3%. Think about that: simply letting anyone work anywhere could more than double global GDP. And that would be a long-term boost to economic growth, not a one-off. Even the bottom end of that, 67%, is an astonishingly huge figure.

It’s not as far-fetched as it might sound. As Clemens points out, workers can often create wildly different amounts of value by doing the same thing in different places (or doing them with different people). A taxi driver who might expect to make $1,500/year in a city in (say) Benin might be able to make $31,000/year in New York City by doing exactly the same thing. That shouldn’t be a surprise: bringing someone like Sergey Brin to work quickly, saving him an hour, is much more valuable in terms of his opportunity cost than, say, saving me an hour.

The institutions that most successful countries have are extremely valuable too. Corruption, instability and political uncertainty all have the potential to be extremely costly for firms, and they often prefer to pay a higher up-front cost in labour terms to locate their production in stable countries with good institutions. That’s one reason why Nissan still prefers to build some cars in Sunderland than Haiti: the institutions effectively boost Sunderlanders' productivity enough to make their higher wages worth paying. If we let Haitians move to Sunderland, they could take advantage of those institutions and make a living for themselves too.

The counterargument will be that a Sunderland filled with Haitians will quickly stop being like Sunderland: Haitians might vote badly, or might be so culturally incompatible that the social institutions that are so important to Sunderland's success, like trust, would break down and ruin things for everyone. That’s a valid argument and probably the main thing we should be talking about when we talk about immigration. But it’s also ambiguous: immigrants tend to have lower rates of crime than natives, and increased contact between immigrants and their neighbours can mostly overcome the cohesion problem.

But even if these arguments did prove to be true, they would be a case for country-specific immigration controls: even if Haitians proved to be too culturally incompatible to come to Britain en masse without undermining what’s valuable about Britain, that would not necessarily be the case for Chinese or Sri Lankans. If this seems ugly it is much, much less ugly than our existing blanket controls on immigration. Letting more people come to Britain should be the priority, not preserving the appearance of cultural neutrality.

What puzzles me is that my fellow free marketeers are often very indifferent (if not openly hostile) to policies that make it easier for foreign people to work in Britain. They cannot believe the economic claims that immigrants 'steal jobs' in an overall harmful way unless they also think that free trade does. There are many keyhole solutions to prevent immigrants from sponging off the welfare state. The cultural arguments, if they can be classed as such, are worth considering but certainly not so powerful that they invalidate the economic arguments. And free marketeers are usually pretty happy to let society adjust itself rather than try to engineer it to become or remain the way they like it.

Fundamentally, migration controls are not just laws about what foreign people can do, they’re laws prohibiting businesses from hiring people and property owners renting or selling to people who were unlucky enough to have been born in the wrong place. On the fact of it, these laws are so staggeringly invasive that no free marketeer could be comfortable with them; when you realise the economic costs it is amazing that anyone can tolerate them at all.

There are lots and lots of bad things governments do that ruin people’s lives. But few cause as much harm to the poorest people as the state controls of where people can work and live that we call ‘migration policy’. Even a marginal step towards a more liberal immigration policy would allow people to create an enormous amount of wealth, and probably do more good than almost any other possible policy. So why don’t more free marketeers start talking about it?

The insanity of current green power subsidies

As I have been saying for some time now the basic structure of subsidies to the various green power technologies is insane. Policy Exchange have just released a report making much the same point (although, inevitably, they are rather politer about it than I am).

The report says that plans to introduce auctioning to enable all technologies to compete on a level playing field should be brought forward.

The thing is that the system should have been that way all along. Now leave aside all of the arguments about whether climate change is happening and all that. For the sake of argument, assume that it is and also that we must do something about it. OK, what?

We would obviously like to reduce the emissions from energy production and increase and or support the production of energy from non-emittive sources. Clearly and obviously that's what we want to do.

But there's a very important point to be made: we don't actually care what non-emittive technology comes forth. We are indifferent, entirely, between oneshore wind, offshore, tidal, solar, biogas and all of the rest. We care about the amount of electricity we can get from each one, sure, about the price of each of them too, but we really don't give a damn which is used: we want simply to be able to use the cheapest one.

At which point there are two methods of encouraging the development of these alternatives. The first would be a carbon tax. Make the fossil fuel stuff more expensive by whatever amount we calculate the future damages will be. If no alternative can produce at those prices then we're all left the best off we can possibly be by still using fossil fuels. If any or various of the alternative methods can beat that price then again, we're left the best off we can possibly be.

Alternatively, we can fix the price of electricity from these various alternatives: those feed in tariffs. But again, here, we want to have one price. Non-emitting electricity is worth £x to us. Great, so all non-emitting electricity gets price £x. We don't do the damn fool thing that the government has been doing for the past decade which is offer different prices to the various different technologies.

So it's not just that this level playing field should be brought forward: it's that it should have been a level playing field all along. For the current system is indeed insane to the point of absurdity. The worse the technology, the more costs a technology imposes upon us all, the more we subsidise it. What?

Chart of the week: US broad money still reliant on QE

Summary: Tepid US broad money growth still dependent on QE

What the chart shows: The chart shows the annual percentage change in US broad money and in credit to the non-bank private sector. Broad money is the recreation by Stein Brothers of the M3 measure discontinued by the Federal Reserve in March 2006.

Why the chart is important: US broad money growth continues to oscillate around 5%. This is better than the 4% M4 growth seen in the UK and considerably better than the 1.4% recently registered for October in the euro area. Nevertheless, US bank balance sheets – and hence broad money growth – still seem dependent on continued quantitative easing. Since the Fed’s ‘taper terror’ subsided in September, broad money has grown by $135bn, compared with the $160bn the fed has spent on buying assets from the banking system over the same period. Total bank credit has grown by $36bn and loans and leases by $19bn (the difference between total bank credit and loans and leases in bank credit is lending to the public sector). By contrast, cash assets have grown by $191bn. What this all means is that US banks are still stocking up on cash and that credit growth remains weak. The economy seems strong enough to support the beginning of a QE taper; but the development of bank balance sheets over the first two or three months after a taper begins, will be a key pointer as to when it will actually end.

So who really benefits from this neoliberal globalism stuff anyway?

This chart comes from this excellent paper by Cristoph Lakner and Branko Milanovic. It shows whose incomes have risen the most (and fallen the most) as a result of this neoliberal globalisation thing we've been having for the past 30 years. The results from the ex-Soviet bloc need to be taken with a real pinch of salt unfortunately, for they use starting figures that most observers consider to be far too high. It's really a stretch to say that Romania today is a poorer place than it was in the dying days of the Ceascescu regime.

However, look over to those who have benefitted.  We'd not be all that surprised to see that many of the Chinese deciles have seen their incomes rise. The growth of China is after all the major economic story of these past decades. But look at that UK bottom decile: 5.5% per annum growth in incomes! That rather gives the lie to the idea that the poor are getting poorer, doesn't it? Ireland's Celtic Tiger growth (note that these figures are up until 2008) similarly seems to have beneftted the two bottom deciles in that country.

The net effect of this neoliberal globalisation thing seems to be that the poor are getting rich. And given that that's what we all want to happen then why is it that so many people complain about it all?

So that's the gender pay gap solved then

We've the release of this year's figures about the gender pay gap and it seems that we'rte pretty much done, we've solved it. The full figures are here. As I've been saying for a number of years now there most certainly used to be gender discrimination in pay. What we want to know now though is whether there still is? And as that chart shows, no, it's very difficult indeed to see that there is. For in the 18 to 40 group pay is indeed roughly equal. It's only in the older ages groups, those who coupld well have suffered from the earlier discrimination, that we are still seeing significant differences in pay.

So, we can declare victory and go home then. Except, of course, there are those who willfully misuse the statistics to insist that more must be done. As in The Guardian:

More than 40 years since legislation was introduced which outlawed paying men and women different wages for the same work, women still face a lifetime of earning less. New figures from the Office of National Statistics show the pay gap is beginning to widen, after years of slow but steady progress. Looking at mean average earnings

And they should be slapped with a wet haddock for that. Because they have been told, repeatedly, that you should use the median average when discussing these figures. The mean is too distorted with the incomes of the 1%, and the 0.1%. What encourages me is that the comments section is full of people pointing out the faults with the assertions being made.

And as to exactly what it is that we did to get rid of that gender pay gap? At root I think it's simply the way work has changed. The more muscular male physique no longer matters in anything but a tiny minority of jobs. Thus there's no particular reason for men and women to be paid different amounts therefore they're not.

How hysterically funny about Mazzucato's "Entrepreneurial State"

You will recall that a central theme of Marianna Mazzucato's book, The Entrepreneurial State, is that all this gee whizz techno shiny shiny that we see around us really comes from stuff that the government has originally subsidised, invented, come up with or otherwise spirited into creation. And of course, the outcome of this is that all your money belong to us.

And one of the examples she gives is the way that the British government subsidised the work that made Apple's iPhone a possibility. Specifically, on touch capable screens able to understand dual movements (things like "pinch and zoom"), something crucial to the technology.

Ah, sadly no, as my sometimes colleagues over at The Register reveal. In fact, a plucky British inventor did come up with the idea, did indeed go to the government and they screwed around so much and for so long that another inventor got there first and was bought up by Apple.

Fentem submitted a funding application to Nesta in January 2003, while he continued to work on new prototypes. "When I first approached Nesta I was told that I would receive a funding decision within 6 weeks," he says. "However, it took Nesta a year to just write the contract. To put that in perspective, it took Apple only 2 years to conceive, develop and commercialise the entire iPhone."

It's worth reading the whole five pages at Andrew Orlowski has done an excellent job there. And the truth is that Nesta, the British government, did not in fact develop multitouch screens. In fact, they managed to cock up the development process so badly that someone else developed it. An advertisement for government direction of innovaiton this is not.

And it also rather guts Mazzucato's basic contention.

One problem, as I see it, is that it is in fact true that invention doesn't happen in isolation. We're all standing on the shoulders of giants after all. But what that means is that the next incremental improvement in whatever it is is ripe, ripe for the plucking as a result of all of the thousands of years of science and technology that we already have. That in turn means that to pluck it one needs to move quickly. And quick movement is just not something you're ever going to get when the State is involved.

Basic scientific research? Dreaming in ivory towers? Sure, the results will be public goods and there's a good argument for some tax funding there. But it's just not going to work in developing actual products and technologies. As the screens for the iPhone show, whatever the stories that Mazzucato is telling.

The start of a political meme

A small exercise in trying to spot where a political meme starts out. For this little story is making its way around the web and I am sure that it will become a standard part of the talking points over the minimum wage in the US. It's this idea that servants today are being paid less than servants were in 1910 America. It comes from this piece by David Cay Johnston:

Consider the family cook. Many family cooks now work at family restaurants and fast-food joints. This means that instead of having to meet a weekly payroll, families can hire a cook only as needed. A household cook typically earned $10 a week in 1910, century-old books on the etiquette of hiring servants show. That is $235 per week in today’s money, while the federal minimum wage for 40 hours comes to $290 a week. At first blush, that looks like a real raise of $55 a week, or nearly a 25 percent increase in pay. But in fact, the 2013 minimum-wage cook is much worse off than the 1910 cook. Here’s why: The 1910 cook earned tax-free pay, while 2013 cook pays 7.65 percent of his or her income in Social Security taxes as well as income taxes on more than a third of his pay, assuming full-time work every week of the year. For a single person, that’s about $29 of that $55 raise deducted for taxes. Unless he can walk to work, today’s outsourced family cook must cover commuting costs. A monthly transit pass costs $75 in Los Angeles, $95 in Atlanta and $112 in New York City, so bus fare alone runs $17 to $27 a week, eating up a third to almost half of the seeming increase in pay, making the apparent raise pretty much vanish. The 1910 cook got room and board, while the 2013 cook must provide his or her own living space and food.

There's an amusement at complaining that the cost of government has gone up there.

But given that these numbers are broadly correct what is the problem with the basic argument being made? That servants are now paid less well than their comparators 100 years ago?

For this certainly isn't something we would expect to see at all. Inequality now is no higher (at the very least it is no higher) than it was then and the median and mean wages have very definitely risen over that time span. So, given what we do know about wages in general of the past century how can we reconcile this?

The answer is of course that in looking at a cook Johnston is not looking at a fast food worker now. Yes, they both prepare food but a cook in 1910 was a senior and important part of the servant household. It was a position reached only after many years of work at a lower level. The cook was, along with the housekeeper and the butler, very much part of the management of the household and part of, to use a very strange phrase indeed, the servant aristocracy. You would also only find cooks in a grander house. To compare such to current day fast food workers is just being historically obtuse.

The correct comparison for a current day fast food worker would be to the sort of serving jobs that an untrained teenager might hope to get in 1910. And in the cooking side of things that would, in 1910 terms, be scullery maid. Who would, in London, have been paid perhaps £10 a year, or at the exchange rate of the time, some $50 a year.

And yes, I do think we can support the contention that today's fast food workers do make more than that $50 a year as adjusted for inflation.

But there we are, of such tricks are political memes created.

The Universal Credit can still improve Britain's welfare

There is agreement across the political spectrum that the United Kingdom’s benefits system is unfit for its purposes; namely, to provide a minimum income (or ‘safety net’) and incentivise work. The need for reform is clear, with the relationship between welfare spending and severe poverty statistics speaking for itself; in the fifteen-year period from 1994-2009, increases in social security expenditure of over 50% have failed to significantly affect the percentage of the UK population living in severe poverty (defined as living below 40% of median income). Indeed, the chart below shows that the proportion of those in severe poverty actually increased over this time span.

Clearly, responding to the challenges posed by 21st Century welfare is not as simple as throwing more money at the problems to make them go away. With hundreds of thousands of people failing to claim benefits that they are entitled to, any reform must aim to reduce the complexity of the claiming benefits for eligible individuals, whilst increasing work incentives. Ensuring that our welfare system is simple to use for those that need to is an important step on the road to raising the incomes of the less well off to a reasonable standard.

Sources: Office for National Statistics/HBAI statistics from Department for Work and Pensions

It is these goals of simplicity and increasing work incentives that inform Universal Credit (UC), which first came to prominence in Iain Duncan Smith’s exposition of the scheme in a speech to the Conservative Party Conference in 2010. Discussing his intentions, he hoped that Universal Credit would “restore fairness and simplicity to a complex, outdated and wildly expensive benefits system”.

Almost three years down the line, Universal Credit still features prominently in the media, but largely for the wrong reasons. There is no doubt that there have been serious shortcomings in the implementation of Universal Credit to date, which have been detailed in the National Audit Office’s latest report on the progress of the project. The report highlights millions of pounds wasted on failed IT programmes, unrealistic timetables for implementation and a lack of transparency; these issues hardly fill one with confidence for the future of UC.

It is hoped that the recent appointment of Howard Shiplee (former Olympic executive) as director-general of the project will bring the experience and skill necessary to steer Universal Credit back on course. This piece will argue that despite the negative publicity surrounding Universal Credit’s implementation thus far, the concept itself is still worth supporting and will help large numbers of people find work and escape severe poverty. Behind the partisan games of political football being played out between parties lies consensus; all three major UK parties support Universal Credit in principle, and the reasons why will be set out below.

How does Universal Credit work, and what are its advantages?

Universal Credit is part of the Coalition’s Welfare Reform Act 2012, and aims to replace six working-age benefits/tax credits with a single welfare payment: income-based jobseeker's allowance, income-related employment and support allowance, income support, child tax credit, working tax credit and housing benefit. This payment will be accompanied by a single, constant taper rate (the rate at which a benefit is reduced to take account of earnings) of approximately 65%.

Consolidating all existing working-age benefits and tax credits into one payment simplifies the system massively: one application, one statement of earnings and entitlements, and one coordinating agency. A welfare system comprehensible to those that need to make use of it is essential. It ensures that the greatest possible number of those in severe poverty are provided with the minimum income they are entitled to. Making the UK’s benefits system easier for claimants to understand will help ensure that taxpayers’ money goes to those that need it. Therefore, the adoption of Universal Credit is expected to substantially increase take-up amongst those eligible to claim: tackling the trend of rising severe poverty that has taken place over past years.

Of course, it is essential that those who claim benefits are encouraged to find work, and the most effective way of doing so is by ‘making work pay’. This is, at least in part, accomplished through a lowering and streamlining of effective marginal effective tax rates (METRs). Marginal effective tax rates represent the amount of money forgone by working more hours through loss of welfare money and paying taxes. METRs under the current system are often inordinately high and unpredictable (see examples in the charts below). As a consequence, they act as a major disincentive to work for many people.

Universal Credit will help to address problematic marginal effective tax rates by introducing a single taper rate of 65%, meaning that those on low earnings will be better off on UC and work will pay more. Work incentives are also increased by the inclusion of an “earnings disregard” (£700 per year for single people): a significant improvement on the standard £260 per year (£5 per week) of the current system. UC’s taper rate will therefore only apply to earnings above this threshold, improving the attractiveness of work.

It is inevitable that in the short-term, more resources will be required to set-up the machinery by which Universal Credit can operate effectively. Official estimates tout the figure of £2.4bn as the total cost of implementing UC, but focusing purely on the short-run cost fails to highlight potential efficiency savings and the reduction of various costs that arise from unemployment. In the Centre for Social Justice’s report Dynamic Benefits, welfare reform proposals largely indistinguishable from the DWP’s version of Universal Credit are estimated to increase UK GDP by £4.7bn. In fiscal terms, the short-term costs of Universal Credit borne by the taxpayer are more than compensated for by significant increases in employment and the consequent prosperity this engenders.

Answering the detractors

There have been various criticisms levelled at UC which raise legitimate concerns about the specifics of the DWP’s proposals. One of the most common objections is that Universal Credit will be managed largely online, meaning that those who struggle to connect to the Internet or lack computer literacy may have trouble claiming benefits they are eligible for. Whilst it is true that without suitable provision of computing facilities and guidance this would affect some people, plans to install 6,000 new computers across Jobcentres is likely to remedy any lack of digital access. Claimants who can make use of the online system from home will benefit from not having to travel to their local Jobcentre, and at worst there will be no change from the current system for those who require assistance with their claims.

A further potential drawback of Universal Credit that has been highlighted is the move to welfare payments on a monthly basis, rather than the current system’s varying weekly, fortnightly and (in some cases) monthly payouts. The Social Market Foundation’s report on Universal Credit, Sink or Swim?, cites a sample of thirty households affected by the move to UC: the majority of which held negative opinions of monthly payments. This opposition stemmed largely from the issue of having to budget more responsibly, and concerns about running out of money before the end of the month. However, it can be argued that encouraging greater responsibility for financial planning could prove advantageous for households: for example, gaining experience of budgeting in jobs with a monthly salary. Moreover, the Department for Work and Pensions is looking to include the options of advance UC payments and alternative payment arrangements in extenuating circumstances, helping to mitigate any difficulties experienced from adjusting to monthly budgeting.


After starting in October this year, Universal Credit is due to expand to Jobcentres in Hammersmith, Rugby, Inverness, Harrogate, Bath, and Shotton; it is planned that this expansion will be completed by Spring 2014. Whether the government will meet its objective of UC being fully operational across the country by 2017 seems unlikely, but it is hoped that with new management and swift responses to the criticisms highlighted in the National Audit Office’s recent report, this important reform to Britain’s welfare system will be up-and-running by the target date.

The temptation to confuse valid criticisms of Universal Credit’s implementation with condemnations of the overall policy itself must be resisted. No policy is perfect, but as discussed above, there are concrete benefits that Universal Credit can bring to the lives of Britain’s poorest people. It will incentivise work, alleviate poverty, encourage responsible budgeting, and (in the long-run) bring the plethora of economic gains that are linked to increased employment. In these ways, the Universal Credit can work.