The horrible mistake made by Jeremy Corbyn and Momentum

We can't help but think that this is a horrible mistake:

T-shirts sold to raise money for Jeremy Corbyn’s Labour leadership campaign are being made by poverty-stricken workers earning just 30p an hour, The Mail on Sunday can reveal.

The machinists in Bangladesh toil for up to ten hours a day to make the garments, which are believed to have raised thousands of pounds for the Labour leader’s fighting fund.

...
Yet a Mail on Sunday investigation has discovered that Momentum – the Left-wing organisation central to Corbyn’s leadership campaign – has bought hundreds of the T-shirts, some emblazoned with the politician’s name in superhero-style lettering, to sell here for £10 each.
 

No, not that, that's eminently sensible. If you're trying to raise money for something then you want to be cutting your input costs to the bone. No, this is the mistake:

Last night Momentum cancelled its contract with the British supplier of the T-shirts and promised to ‘rigorously’ check the sourcing of its merchandise in the future.

Why cancel? Providing work for the labouring man to do is a good thing, surely? And as Madsen Pirie of this parish has been saying for at least a decade so far - buying things made by poor people in poor countries makes those poor people richer.

Thus what better manner to advance the cause of international brotherhood? Something which we believe is the sort of thing Momentum peeps mouth off about.

The poor worker gets 30p a t-shirt. around 25 p more than they would make in the same time staring at the south end of a north moving water buffalo. £9.70 is raised for Jezza's campaign.

International trade and voluntary exchange make all better off. So why not do more of it?

Yes, we think it must just be a horrible mistake. For surely they're not so ignorant as to believe that voluntary exchange and international trade don't make everyone better off, are they?

 

Perhaps we're bad people but we do find this amusing

The Observer tells us that Academy heads, or rather the heads of chains of Academies, are charging expenses to the taxpayer:

The leaders of academy schools are spending taxpayers’ money on luxury hotels, top-end restaurants, first-class travel, private health care and executive cars, a joint investigation by Channel 4’s Dispatches and the Observer can reveal.

Expense claims released under the Freedom of Information Act lay bare for the first time what critics claim is an extraordinary extravagance by some academy chain chief executives and principals, at a time when schools are struggling financially.

Reading through the list of claims we wouldn't say that all of them sound entirely appropriate. But "credit card bill for expensive meal" and "entertainment bill for big meeting with staff" do sound rather different, don't they? But they also seem modest compared to our memories of certain civil service awaydays and the like. Perhaps someone would like to do a proper comparison? 

The amusement starts here: 

Sir Daniel Moynihan, the chief executive of the high-performing Harris Federation, earns £395,000 a year.

Bloke who runs high performing organisation gets paid a lot. We thought that was rather the point to be honest. Incentives do, after all, matter. 

But of course there must be someone to provide a rent-a-quote to tell us all how terrible this claiming of expenses is:

However, asked to respond to the revelations, Margaret Hodge, the former chair of the Commons public accounts committee, said that the checks and balances in the academy system were not robust enough

Ah, yes, Dame Margaret, Lady Hodge:

New figures have revealed the two MPs representing Barking and Dagenham were among the biggest spenders in London over the last Parliament – costing the taxpayer £1.4million in expenses.
...
Our investigation, looking at thousands of claims over the last five years, has shown Labour MP for Barking, Margaret Hodge, had the 10th highest expenses bill in the capital at £708,492.

As Dame Margaret, Lady Hodge, points out that was all spent in the pursuit of her duties as an MP. Including, no doubt, travel and entertainment expenses and so on as well as staff wages.

Just a little amuse gueule before a Sunday breakfast.

It's amazing what people will consider a benefit of the EU

Now that the Brexit vote has happened it's probably a little late or these stories about how the European Union has made our lives better. But even so they're trying - and even so they're getting it wrong:

Britain’s exit from the EU will mean the end of Brussels’ attempts to make UK households install energy-efficient light bulbs. But one couple’s experiences show why such bulbs are still worth bothering with – even if older types are still available.

Pete and Linda Powell said they had saved £400 a year after they switched almost all the bulbs in their house to LEDs. The retired couple, from Skipton in Yorkshire, switched their bulbs from low-energy halogen bulbs three years ago.

That we didn't need a law to make us do this is shown by the fact that the switch saves £400 a year. We do generally assume that consumers are not drooling morons and thus do things which benefit them voluntarily.

However, this demonstration of the EU's concern for our wallets is still wrong. Because of course there has been no legal move whatsoever to shift us all over to LEDs. What did happen was that there was a legal move (to the point of a ban on the sale for domestic use of them) away from incandescents.

Unfortunately that legal ban came into effect before LEDs were ready for prime time, leaving people to have to switch to the markedly more expensive and less efficient compact fluorescent bulbs. And yes, while they fit the same holes as the earlier bulbs that's not enough, some investment in changing the set up was also necessary.

So, what we actually have here is that the free market, entirely unadorned, would be shifting us around about now all quite naturally from incandescents to LEDs. The EU's intervention forced us all, at some cost, to shift to the intermediate and not very good technology of CFLs before the move to LEDs.

This is not, to put it mildly, a victory for the powers of intervention in that free market unadorned.

But then there's that horrible and pernicious tale out there that the ban on incandescents was actually lobbied for by the light bulb manufacturers who had these lovely factories capable of making CFLs but which no one wanted to buy....and yes, one of us has been a cog in the global supply chain for the lighting business for some decades. Our opinion is that that horrible and pernicious tale is not mere cynicism about regulatory capture.... 

We think this is rather important actually

A standard result in economics, albeit one that far too few people realise is a standard result, is that there's no such thing as a solution, there are only trade offs. We can have a little bit more of this at the cost of a little bit less of that and there are even things which approach a free lunch but very very few of them.

We can, for example, promote primary innovation by giving strong intellectual property rights to it but at the cost of, the stronger such rights, the derivative innovation that we've just banned. We can indeed make today's poor better off through redistribution but at the cost of those higher tax rates reducing future economic growth and thus making tomorrow, including tomorrow's poor, poorer than they need be.

This would seem to be a concept that public health peeps need to grasp:

There is strong evidence that alcohol causes seven types of cancer and probably others, according to a review that dismissed the claimed health benefits as "irrelevant".

A study of existing research found strong evidence of a direct, harmful effect of drinking, even though scientists are unsure of the exact biological reasons why alcohol causes cancer.

Writing in the journal Addiction, Jennie Connor, from the University of Otago in New Zealand, said alcohol was estimated to have caused about half a million deaths from cancer in 2012 alone - 5.8 percent of cancer deaths worldwide.

That alcohol causes cancer is interesting to know. But it is absolutely not true that any health benefits are irrelevant. They're actually the point. We know that there is a trade off here.

That trade off starting with the fact that none of us (as far as we know at least) The Virgin Mary, Elijah or others who ascended without dying. Death is thus going to come to us all. Not drinking and not getting those cancers (to the extent that not boozing only reduces those risks anyway, not eliminates them) only means that something else will kill us.

We thus want to know the balance of drinking and raising our changes of those cancers and drinking and lowering our chances of some other disease. Far from the health benefits being irrelevant they are the vital information we need to be able to make the trade off. For as we know, a solution, perfect health forever, is not granted to us in this vale of tears.

And, of course, we would also need to include in our trade off the knowledge that beer is proof that God loves us and wants us to be happy (yes, we know, Ben Franklin never actually said that) and more importantly that there is utility, in the alleviation of the troubles of this vale of tears, in the consumption of booze.

For that is what we''re all trying to do in this life, maximise our utility. Entirely true we can be on different sides of Pascal's Wager and thus the time span over which we are trying to maximise and thus take more or less note of religious prohibitions against the Demon Rum. 

But even then it is the trade off in front of us which is the important thing, not the negative (nor, obviously, only the positive) effects that matter.

That skeleton with the scythe is coming for us all. Now, how do you want to fill in the time until then and which risks of what do you wish to run?

Other effects are not irrelevant to this point they are the essential beginning of the decision making process.

 

The right way to give workers more control

Theresa May says that she wants to put workers’ representatives on company boards, in the German style. 

That would be a bad idea: it perverts the board’s incentives to make the company as profitable and efficient as possible, and creates unnecessary divisions at the top of the firm, where unity of vision and purpose are very valuable. 

Giving unions more power – for it is they who will be representing the workers – is also not necessarily a good idea. One study suggests that this rule has cost German firms 26% of shareholder value, which is very large.

How then to give workers more say in how their firms are run? One way might be to give workers shares in their firms. That way they benefit when the firm is well-run and valuable, and they will have a voice at shareholder meetings. The board will serve them (as well as other shareholders), but will still function normally as a board.

Workers who have been at the firm for more than six months, on a permanent contract, could be given equivalent to 5% of their salary in shares in the firm. If they want to sell those shares, so be it, but if they value having a long-term stake in their firm and say over how it is run, they will not.

Who pays? It depends on how rapidly such a system was introduced. If it was done immediately through the creation of new shares it would, effectively, be a tax on existing shareholders. This would be a bad idea – it would effectively be a tax on investment, which depresses growth. 

Better would be to phase such a system in over a number of years so that as new contracts and wages were negotiated this would gradually take effect. This would mean that it would probably be the employees themselves paying, though if it’s true that wages are sticky upwards as well as downwards (so workers don’t get wage rises when they should) it could lead to some being better off.

The one problem with this would be minimum wage workers – requiring that they also be given 5% of their salary in shares could make the cost of employing some of them prohibitively high, causing unemployment. To avoid this, only workers earning 60% of the median wage or more should be included in this scheme.

I’m not entirely convinced that workers having more say in how their firms are run is worthwhile. Really this feels like a solution in search of a problem. But if Theresa May thinks it’s important, so be it. If she is going to give workers more say in how their firms are run, she can at least try to do it properly.

University fees should rise - but let's have a market, not government, determine them

Tuition fees are to start rising in line with inflation. This obviously has to happen but we think that there should be more than just this going on:

Universities in England have started telling potential students that their tuition fees will go up across the board from next year, the first rise since fees were nearly trebled to £9,000 in 2012.

Manchester and Durham are among universities already listing annual undergraduate fees as rising to £9,250, following an announcement by higher education minister Jo Johnson that universities meeting expectations under the first year of the new teaching excellence framework (TEF) were able to raise them from September 2017.

This is government fiat stating that prices will, or may, rise and that's not the way to set prices at all. Prices are information, something that tells us all how many people want some thing and how many are willing to provide it at that price or in that quantity.

It is this which leads to the standard finding that the best way to ration something is by price.

Here we also have a further reason to desire market pricing. Currently Physics at Cambridge charges the same price as Gender Studies at an ex-Technical College. The two really are not of the same value, neither to those who undertake such courses nor to society as a whole. We would thus rather like to see some price differentiation here.

And finally, the major beneficiaries of tertiary education are those who receive it. Absent some of those Gender Studies courses graduates enjoy higher lifetime earnings. Thus, given that they are the people who benefit they should be the people bearing the cost.

Please, no, University is not a public good. It is both rivalrous and excludable. It is not even true that having a lot of graduates around is a public good - Adam Smith pointed out that primary education probably does provide that public good of a generally literate and numerate population but this does not apply to tertiary education.

We should thus free the market for university fees and then we can really find out who does benefit, who wishes to partake and who wishes to supply. And we can only do that if we really are using market pricing not whatever it is that the government of the day is willing to countenance.

One less thing to worry about after Brexit

Hans Von Der Buchard has written an interesting profile on German anti-free trade campaigner Thilo Bode at Politico.

Since Bode, who is 69, entered the fray in 2014, support for TTIP in Germany has plummeted from 55 down to 17 percent, putting pressure on the most powerful country in the EU to drop its support. Major German trade unions, which once supported an agreement, now oppose it.

Bode’s book “The Free Trade Lie,” (in German, Die Freihandelslüge) is a best-seller, having sold 70,000 copies in the past 16 months. An anti-TTIP rally in Berlin in October 2015, which Bode helped organize, drew more than 150,000 people, making it the country’s largest political demonstration since the 2003 invasion of Iraq.

More worryingly Bode no longer just has TTIP in his sights. He's also looking to block the CETA partnership, which covers trade between the EU and Canada.

Recently, Bode came a step closer to claiming his first scalp. Since the beginning of the year, he has expanded his campaign geographically and substantially, opening a new office in France — where skepticism over TTIP is mounting — and shifting his focus from the negotiations with the U.S. to the smaller but already completed EU-Canada deal, the Comprehensive Economic and Trade Agreement. “If CETA [is successful], then TTIP will follow,” he said. His domino logic works the other way as well: If he can bring down one deal, he can also wreck the other.

Bode’s efforts were instrumental in creating the public pressure that caused the EU to drop plans to ratify the deal without involving national parliaments. The decision, taken by the European Commission, could prove to be a mortal blow to CETA, subjecting the treaty’s every deal to the approval of 38 national and regional legislative bodies. It also sets a precedent for TTIP and other future trade deals, potentially subjecting them to the same legislative bottleneck.

Striking up new trade deals after Brexit will be challenging, especially when you take into account our worrying lack of trade negotiators. But, Brexit Britain is at least safe in the knowledge that 7 years (!) of negotiations won't be scuppered by a German Greenpeace activist opposed to a completely different trade deal.

There's industrial strategy and then there's industrial strategy

With the new Prime Minister, Theresa May, indicating that she is in favour of an industrial policy all sorts of people are having palpitations of excitement at what this means. And we have to agree that we're all in favour of an industrial policy too. The discussion therefore centres on what the policy should be, something where we feel that many aren't really thinking hard enough:

Reform of finance is vital, to boost investment and to rebalance the economy towards manufacturing and exports and disadvantaged regions of the UK.

Quite why we've got to have more manufacturing isn't explained. Manufacturing output peaked in the middle 00s, true, but it's only a whisker off its peak now. Manufacturing employment has fallen through the floor, quite true, but that's because of automation, not a lack of manufacturing being done. What has really happened is that services have grown faster than manufacturing - manufacturing thus declines as a portion of the economy but not, really, in size itself. 

And other than the case of Germany that portion which is manufacturing in the UK economy is entirely in line with other similarly advanced economies in Europe and around the world.

That emphasis on exports also looks a little odd. Back when we had fixed exchange rates "Export or die" was true (even if it should have read "Export or the government will have to devalue which is is most embarrassing") but with floating rates it simply isn't. We're not about to not export ourselves into a sterling crisis simply because with floating rates we can't have one.

Sure, we know what the real logic behind this is. Unions are good, manufacturing has lots of unions, thus there should be more manufacturing around. Which is a rather conservative way to build an industrial strategy if you ask us.

We would agree with this:

But this requires a shift of focus, from the quantity of finance to its quality. Long-term, strategic and “patient” capital is needed.

OK. So how do we do that? Equity of course. The net present value of an equity investment is, by definition, the net present value of the future income stream. Thus that value, at any one time, reflects the view of that value out to perpetuity. It's difficult to think of any form of financing more long term than that.

Policymaking over the past half-century has relied on a narrow school of economic thought, dominated by a simplistic idea of “markets” and “market failures”, of “competition” and “shareholder value”. May’s new agenda will need to draw on a much richer palette.

Ahhh, that's not what they mean, is it?

We're not averse, as we say, to at least the discussion of an industrial strategy or policy. But we would rather insist that if we're going to do that then we've got to sit down and think through the underlying assumptions being made. And that's the part that everyone with their own little list isn't doing.

Equity capital is long term, patient, capital. Manufacturing is nothing special and Britain's share of it is pretty normal for a modern economy. That this isn't what the industrial strategists are saying is what is wrong with an industrial strategy, not the idea of having one in the first place.

Our own such policy, or strategy, would be to free the economy from many of the shackles which bind it and then see what it is that Britain and Britons can do where we have a comparative advantage. All the other things, exports, the balance of payments, employment, wages and so on will be cured once that is divined. And it is only market processes red in tooth and claw that can do that divining for us.

Fewer bureaucrats, lower taxation, that's how we'll actually find out.

Could we get the Resolution Foundation to think, just a little bit, maybe?

The Resolution Foundation tells us that the young people of today are being shafted by the economic set up. Further, by age 27 the average millennial has earned, in their lifetime, £8,000 less than someone at the same age in the previous age cohort, as measured 25 years before.

This is appalling and something must be done.

Our suggestion would be that someone go and talk to David Willetts, who is fortunately the head of the Resolution Foundation. He was also variously Shadow Secretary of State for Education and later Minister of State for Universities and Science. We would suggest presenting him with this snippet and then asking him what he thought would be the effects upon the earnings of people up to the age of 27:

Overall participation in higher education increased from 3.4% in 1950, to 8.4% in 1970, 19.3% in 1990 and 33% in 2000.

It is higher than that now of course.

Just to prompt - the major cost of attending university is the opportunity cost. One might earn while there but it's going to be odd jobs and part time rather than the first few years of a career. So, the more of an age cohort that goes to university the less the cumulative earnings of that cohort are going to be a couple or five years after the likely graduation age.

It is also a generally stylised fact that graduates do not earn more than non-graduates straight out of the starting gate. Those extra three or four years in the workforce mean that it's not until some years after graduation that graduate earnings start to pull away from those who went straight to work.

That is, if we have a greater portion of an age cohort going into tertiary education we would rather expect earnings of that cohort to be lower at 27 or so. Probably not at 35, but probably so at 27. We would certainly expect cumulative lifetime earnings at 27 to be lower and we would strongly suspect that current earnings would be too.

This report argues that this one fact, these lower cumulative earnings, mean that the entire welfare structure must be changed. Perhaps it should be but the solution to this problem is to have fewer going to university. Which isn't we think, quite what they meant to argue.

Purely by chance we spotted this in The Guardian:

Our nine-point guide to spotting a dodgy statistic

We would slightly change that point, to, well, you've got to understand what is causing your statistic before you start decrying it. True dat.

Zachary David is wrong about futures targeting

Last week Zachary David wrote a critique of nominal GDP futures targeting that was favourably shared by a few people I respect, but whose arguments I don't find persuasive. In it, he argues that though targeting NGDP is a fairly persuasive argument in general, specifically Scott Sumner's idea of targeting the price of contracts on an NGDP futures market would not work firstly because of revisions, and secondly because unlimited liquidity at a fixed price breaks market.

I think both objections are wrong, and indeed are wrong in a way that actually illustrates very nicely why targeting expected NGDP growth through futures markets is an attractive monetary policy regime. (Incidentally, I forgot to post this when I wrote it, last week, and in the meantime Scott has written a reply himself.)

Prof. Sumner says the government should, as well as issuing inflation-linked bonds, issue NGDP-linked bonds. Just as a regular bond might pay at a specific interest rate and return a particular principal on maturity, and an inflation-linked bond does the same but with extra to neutralise the effects of inflation, an NGDP-linked bond would add money onto the final principal to reflect changes in NGDP. So if a regular £100 bond pays back £105 on maturity, and inflation was 2% over the period, an inflation-linked bond would pay back £107; if NGDP growth was 5%, an NGDP-linked bond would pay £110.

This means that the current spread in price between a regular and inflation-linked bond reflects market expectations of inflation. If you expect 2% inflation, you're willing to pay exactly 2% more for an inflation-linked bond—no more or no less. So one way to target 5% growth in NGDP would be for the central bank to buy and sell the NGDP-linked bonds until the difference is 5%. When investors stop buying or selling from the bank then they must expect NGDP to grow 5%.

But David says this market is weird: "in general, a well-functioning market shouldn't have an infinitely liquid counter-party triggering automatic causal effects against every position." He also says it "defeats the purpose of price discovery". But there are a plethora of similar examples where this sort of behaviour isn't weird at all.

Currently, central banks consider and cite market forecasts of inflation when they decide whether to increase or reduce the monetary base—exactly the same calculation as in Sumner's scenario, except more slowly and lumpily. Markets only fail to expect the inflation target to come up when they think the Bank isn't credible or is deliberately going to miss it (because, for example, there is a big supply shock, something that is not a problem for NGDP targeting).

In this real live market "expressing your view immediately causes your view to be less right". Indeed, in this futures market, a perfectly credible bank would not need to buy and sell much on this market at all, since investors would always expect it to. This is exactly the same as in regular inflation targeting: demand shocks to countries with credible central banks do not usually change inflation forecasts—people know they will balance the shock out.

Consider also Switzerland's currency peg, or the UK's entry into the ERM. The bets market actors made were not reacting to external shocks, they were questioning the willingness of the UK authorities to do what was necessary to maintain the peg—they were testing credibility. In Sumner's world, bets on the NGDP futures market are bets about credibility. The central bank is not shouting like Canute at the price to make it go where they want, they're changing the real world so it's the right price.*

David's other objection also seems quite clearly falsified by mundane features of normal markets. He says that revisions to data mean that while firms are betting based on the true value of NGDP at a given point, they are rewarded based on what the statistical authorities report, which involves ~1% of error. He notes Sumner's point that if these aren't systematically too high or too low, no one would be expected to lose out over time by betting consistently on the true value, but he still objects.

But just consider regular markets. Every single market involves trading on data that includes error. Inflation-linked bonds involve the error in the retail prices index—not to mention the subjective decisions about quality and basket inclusion the stats office must make. And other markets invest based on considerably worse data like Chinese household income or GDP or industrial production statistics. These are simply not big problems with markets; markets are made to aggregate the info that we have, generating the best possible "answer" from that. If you disagree, you can make money saying so.

Finally David says people will not trade on the market if it exists. It's not clear that that's a bad thing. The reason they won't trade—if they don't—is that there is no doubt what's going to happen: they trust the central bank to deliver 5% NGDP growth. There is no risk, in this world, that it will fail and that they should hedge against this risk, since their customers buy their products with nominal dollars. Bear in mind that if people overall really did think NGDP would overshoot they could buy infinite bonds off the bank and make incredible sums if they were right. The reason David expects little trading is that he thinks the Bank will be credible.

So David is wrong. His examples are falsified by existing markets: if his claims were true, then it would have been impossible or crazy for the Swiss National Bank to peg the Franc, and it would have made no sense for George Soros to short the pound in 1992. If he was right about revisions then practically no markets would work, since practically all data is revised or measured with substantial error, and yet markets based on that data function well. NGDP futures targeting is a policy that could work—or if not, then for reasons not highlighted by David.

*David's sketched out scenario seems to me a partial model of the type which illustrates why formal modelling can be useful. If someone "just sells" NGDP contracts then it's true that the central bank will buy them at the price peg. But the key thing that extra money base would be expected to change the price of is NGDP contracts themselves. So any increase in the money base would be expected to trigger people into buying NGDP contracts. The individual move would sow the seeds of its own erasure and would have no net effect, even in terms of a yo-yo: markets would know in advance. It is not a reductio ad absurdum of the system at all.