Blog RSS

The Pin Factory Blog

"Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice" - Adam Smith

Raise wages, perhaps, or possibly lower benefits

Written by Tim Worstall | Thursday 12 December 2013

We have one of the usual arguments here about immigration. An employer, in this case Dominos, says that they could hire 1,000 people immediately if only people could be bothered to to do the work they are offering. The response was that perhaps they should try paying a little more in order to encrouage people to apply:

The immigration minister, Mark Harper, has hit back at employers who say they have to recruit foreign workers from outside Europe to fill low-paid jobs by telling them they should offer better wages. Harper said that Lance Batchelor, the chief executive of Domino's Pizza, should reflect on the salaries he was offering if he could not fill 1,000 vacancies without recruiting unskilled staff from outside Europe. The immigration minister told the Commons home affairs select committee: "He should probably pay his staff a little more and he might find them easier to recruit. It's a market."

That's a fine answer as far as it goes: but it's not really a complete analysis of the situation. For what it's leaving out is the rigging of that market by government itself. We're all aware that we have a serious problem with the tax and benefit withdrawal rates on the low paid in this country. There are millions who face marginal rates above 60% and even tens of thousands facing them of over 100%. And it is indeed the change in disposable income which is the incentive to work or not, not the wages that you are nominally being paid.

OK, now think of this same problem from the other side. Say Dominos is paying £7 an hour (I've no idea what the correct number is) and they cannot get the labour at this price. Sure, perhaps they should offer more to get what they want. But precisely because of the high tax and benefit rate they have to offer much more to change behaviour. If they offer another £1 an hour then only 40 p to nothing of that gets through to the disposable income of the worker they're trying to incentivise. So part of their problem is indeed that the government taxes the working poor too highly. A rise in hte personal allowance would help here.

But there's one more thing. Recent immigrants are not given access to hte full panoply of the welfare state and its subsidies. Therefore, as they work they face lower benefit withdrawal rates and thus greater changes in their disposable income from taking work or not. We've thus a rather perverse set of incentives built into how we do things. Recent immigrants are always going to be more likely to take low paid work than indigenes are, simply because we've structured the welfare system to create the incentives this way.

View comments

The Internet Watchmen

Written by Charlotte Bowyer | Wednesday 11 December 2013

As Tim Worstall notes, new government plans to block online terrorist and extremist content are extremely worrying. Along with the introduction of default 'opt-out' porn filters and the criminalisation of rape porn, they are another example of Cameron's politicised censorship of the web. Whereas reducing the proliferation of child abuse images is a good thing, this new measure results in the censorship of ideas. Furthermore, whilst it is relatively straightforward to identify child abuse imagery, it is much less so (and arguably impossible) to decide which ideas are 'too dangerous' to viewed in the UK.

Aside from these issues there is also the question of how such a content block would work in practice. In many ways, how to block can be as problematic as the censorship itself.

The government has said that it wants to model the new blocking unit on the Internet Watch Foundation: a part-EU, part internet industry-funded UK 'hotline' for child abuse imagery. The IWF assesses material submitted by the public and flags up UK-hosted content to be removed by service providers. Content from outside the UK is added to a URL 'blacklist' which ISPs then block UK access to.

There are a number of issues with this model. First, there is no guarantee that what the IWF flags up is actually illegal. With no legal clout, the IWF acts on content it deems 'potentially illegal' - and there is little to stop legitimate content getting wrongly marked. One controversial case saw a picture of an album cover on Wikipedia getting blocked until the backlash forced the IWF to reverse their decision. Appealing against the IWF's decisions can be a difficult and opaque process, not least because of the difficulty of appealing against the illegality of an image you can't even see.

Despite the IWF's lack of legal authority, the Open Rights Group claims that their blacklist has never been assessed by a court or legal body. This makes their actions rather murky. Given its sensitivity ISPs can't see the content of the blacklist to make their own judgement; they must either block all of it or none.  On top of this, there are also problems with the technology ISPs use to actually block the URLs - which can be unreliable and block too broadly.

In addition, from April 2014 the IWF will shift from a being reactive body -acting only on content sent to it - to a proactive one, actively seeking out images of abuse behind pay walls and on peer-to-peer networks.  This approach is another step in the active policing of the web, and is also likely to be followed by the new anti-extremist unit.

Issues of political and religious censorship are much more complicated than that of child pornography. The unaccountability of the IWF and its lack of judicial oversight  therefore make it a poor model to copy for what is an incredibly controversial (and dangerous) policy. Since the new unit will be publicly funded, its decisions may come under greater legal scrutiny. On the other hand, a government-funded body could become politicised and overzealous in its mission. In any case, a clear due process and a rigorous appeals system will be absolutely essential.

Crime & security minister James Brokenshire says an update on the proposals will arrive shortly, though the fact that civil liberty groups claim not to have been consulted on the matter is rather worrying. The sensible thing to do would be to scrap this idea altogether. Since this is unlikely to happen, both the politics and the technicalities of the initiative are bound to prove difficult indeed. 

View comments

Taxes were too low in the UK this year by precisely £604.48

Written by Tim Worstall | Wednesday 11 December 2013

The Guardian, not that it has quite realised it, has proven that in the very worst case taxes were too low in hte UK by £604.48 this year. Here is the proof:

Members of the public have donated almost £900,000 to the government so far this financial year to help pay off the national debt or boost public spending, figures from the Treasury show. Clearly the 11 contributions, ranging from 78p to £520,000 and totalling £898,539.80, are a drop in the ocean of Britain's £1.2 trillion national debt, which chancellor George Osborne announced last week was set to be £18bn lower than forecast in March. But it is the highest amount since £1.08m was given in 2010. The figures, supplied under a freedom of information request, showed that most of the money donated since April – more than £897,000 – was in the form of bequests. Gifts and unclassified payments add up to £604.48.

This is, of course, rather different from what most people actually say about taxes. But then we do know that there is this thing called revealed preferences. Do not look at what people say as a guide to their true views but at what they do. And if you think that taxes are too low then you will indeed send in some extra cash to the Treasury. And some people did as above to the tune of that six hundred quid. We can ignore the bequests as those aren't actually bourne by the people doing the bequeathing. The incidence of those gifts is clearly upon those who did not inherit it instead...and as we know it's rather easier to call for other people to pay more in tax than it is to be willing to cough up yourself.

I've made this point in several different places over the years but it has only just occured to me that I've been missing a trick. For we do have estimates of how much tax people ought to be paying but aren't through a varietey of means. Let's take the egregious Richard Murphy's £120 billion estimate of not paid tax as a result of tax avoidance and tax evasion. We can even pretend that this figure is correct if you like. Now we can apply revealed preference to this. That number might be what politicians say people should pay but by the revealed actions of the populace in dodging it it isn't what the populace thinks the tax take should be. That is, if we look at additional taxes voluntarily offered then taxes are too low by a few hundreds. And applying exactly the same logic we can also say that taxes are too high by £120 billion. And that latter sounds more likely to me too.

View comments

No, Britain isn't a developing country

Written by Sam Bowman | Tuesday 10 December 2013

Britain is a developing country, says Aditya Chakrabortty. He bases this largely on the fact that it is below some poor countries on a number of international rankings. (Never has an article owed so much to Wikipedia’s “List of countries by” pages.) Some of the rankings seem obscure: is Barbados's superior ‘ground transport’ system worth caring about? Does Mali beating the UK in terms of business investment tell us anything? Others rely on the reader not knowing much about the country Britain does worse than: the UK may have a worse road network than Chile, but Chile's Public-Private Partnership roads have made it a regional leader in infrastructure.

One thing that Chakrabortty is particularly concerned about is graphene, a super-strong substance first isolated in 2004 and pioneered by scientists at the University of Manchester. What worries Chakrabortty is that South Korean firms are bringing graphene to market much more quickly than British firms. This, he says, is emblematic of “a familiar pattern of generating innovations for the rest of the world to capitalise on”.

I guess that’s supposed to be a bad thing, but it doesn’t sound like it to me. It’s good when inventions spread beyond their birthplace: to use Matt Ridley’s metaphor, the ideas ‘have sex’ and mutate more quickly. Overall, the world – and Britain, if for some reason that’s all you care about – has done well from Tim Berners-Lee’s world wide web being capitalised on by non-Britons in Silicon Valley. Germans are better off that Japanese firms make cars as well as Volkswagen, and Finns are better off that Californians tried to make mobile phones better too.

Chakrabortty might object that he doesn't mind South Koreans doing well with graphene, he just wishes Britons were too. But why graphene in particular? Chakrabortty’s counterpart in Seoul could write an identical piece worrying about South Korea’s relative weakness in finance, tourism, the cultural arts, or telecommunications. When firms in different countries specialise in different areas it is pointless to look at any single product or sector to judge which country is healthy.

There’s not much point in comparing the growth of rich and poor countries – poor countries are playing ‘catch up’ and can grow quickly by applying innovations already developed elsewhere. But if Britons should be worried about something, it’s the UK’s centralised public sector, which, lacking the profit motive as a crucible for new ideas, is less innovative than international equivalents. For instance, the British health system essentially free rides on innovations in America.

Chakrabortty asks “How can any nation that came up with the BBC and the NHS be considered in the same breath as India or China?”. Good question.

View comments

Chart of the week: US home equity withdrawal picks up

Written by Gabriel Stein | Tuesday 10 December 2013

Summary: US mortgage equity withdrawal has picked up – but the scope for more isn’t there

What the chart shows: The chart shows mortgage equity withdrawal as a share of the change in personal disposable income

Why the chart is important: In 1957, US households’ equity in their houses was three times the value of their mortgages. As recently as 1989, it was twice as much. By Q1 2009, the value of the mortgages was close to twice the equity. Since then, by dint of furious deleveraging, US households have restored parity between mortgages and homeowners’ equity. In recent quarters, they have taken to withdrawing some equity from housing in order to underpin spending. But, the scope to do so on a pre-crisis scale – when mortgage equity withdrawal could reach up to 10% of the change in disposable income – is no longer there. This means that US consumption will depend on the actual change in household incomes, with some input form a pure wealth effect. Given the current weakness of US income growth, this means that the American recovery, while continuing, will remain sluggish.

View comments

One of those plans that gang aft agley*

Written by Anonymous | Tuesday 10 December 2013

I think we'd all probably consider it desirable that children get to go to school and to go out and play rather than have to labour for their bread from an early age. However, quite how we achieve that wondrous state is something that is more contentious. For there's good evidence from India that simply making child labour illegal increases the amount of it that happens.

There are many policy options to readdress this. Bans and regulations against child labour are among the most popular worldwide. When perfectly enforced, bans force employers to forgo the use of child labour. However, it is not clear that such laws will always lead to reductions in child labour. In reality, governments in countries where child labour is prevalent, rarely have the capacity and resources to perfectly enforce regulations on child employment, as documented in a recent study by economists Eric Edmonds and Maheshwor Shresthra (2012). According to a simple model by Kaushik Basu (2005), when bans are imperfectly enforced, they raise the cost of hiring children, as employers anticipate facing stiff fines or other penalties when caught using child labour. Thus, when imperfectly enforced, bans may simply lower the wages that children are paid. If families send their children to work out of necessity, this can have perverse effects, as it lowers the income for families relying on child labour. Therefore, a drop in child wages may compel families to supply more child labour, rather than less.

If the entire brood is starving then you might send one or two out to work and try to educate the others. But if that ban on those first two leads to their wages dropping you might need to take all of them out of school. And it is very much this sort of effect that they've found.

We might say that this could be solved just by perfect implementation of the law: well, good luck with that among India's 1.2 billion people.

My own opinion on this is that many of the things that we consider desirable aspects of society, no child labour, the economic emancipation of women, education, shorter working hours and so on, they're the results of an increase in economic wealth, not a cause of it. Sure, there's something of a feedback going on but it's being rich enough to not need the child's paltry wages that leads to their being educated. That child mortality rates fall (an excellent example of people very definitely getting richer that doesn't necessarily show up in monetary of GDP figures) so that women can do something else with their lives rather than just pump them out. That there is that surplus available to invest in education, that again there is that surplus available to even have the concept of leisure, it is this that drives the improvements we wish to see. Not the passing of laws that insist we must have these things, or stop doing them, but that as wealth increases we can afford not to do the undesirable things and also afford to do the desirable.

It's growth first in other words.

 

 

 

 

 

*Whatever it is that this phrase actually means.

View comments

How do politicians manage to believe such things?

Written by Tim Worstall | Monday 09 December 2013

I'm slightly boggled by this statement:

Tim Farron, South Lakes MP and chair of the all-party parliamentary hill farming group, said: "We need to do all we can to support our farming industry, particularly in the uplands where life can be a real struggle. This support and funding could make a massive difference to upland farmers throughout Cumbria and help show the next generation that there is a real future in a career in farming."

It appears to me to be an example of cognitive dissonance. For we're also being told this about that same occupation:

An upland farmer earns, on average, only £6,000 a year, which has led to a number of people leaving the industry.

That you can only earn £6,000 a year as an upland farmer is proof perfect that there is not a real future in a career in this type of farming. It is true that not everyone is paid their marginal product but for self-employed people like these hill farmers it is indeed so. Their earnings are exactly the measure of the value that their labours are adding. And given that we're in a country where the GDP per capita is some £25,000  (recall, this includes all of those who do not contribute to the money economy at all) they are producing remarkably little value as compared to the rest of us.

This is telling us that hill farming is something we should stop doing therefore, not something we should be devising ways to prop up. We would all be richer if these farmers simply stopped and went off to do something else.

View comments

Introducing you to the word emporiophobia

Written by Tim Worstall | Sunday 08 December 2013

Via Don Boudreaux we get this wonderful economics paper, Emporiophobia:

There is widespread emporiophobia (fear of markets) and this has important policy implications as it leads voters to demand anti-market policies. There are many reasons for this anti-market attitude. However, economists could reduce emporiophobia if we stressed cooperation rather than competition in our writings and policy discussions. In a sample of introductory textbooks, competition is mentioned on average 8 times as often as cooperation. The fundamental economic unit is the transaction and transactions are cooperative. The benefit of a market economy, increased consumer surplus, comes from cooperation through transactions, not from competition. Competition in a market economy is competition for the right to cooperate. Competition is important because it guarantees that the best cooperators will win and because it establishes the efficient terms for cooperation, but cooperation is fundamental. For most people, competition has negative connotations as it focuses on losers, while cooperation implies a win-win situation. As an example, if we say “Wal-Mart outcompeted its rivals” we think of losing firms being bankrupted. If we say “Wal-Mart did a better job of cooperating with its customers” we think of the benefits created by Wal-Mart. Economists in our policy and textbook writing should strive to use the second sort of locution, not the first. Other implications involve the morality of the market, “giving back,” and characteristics of market failures.

This is of course a political, propagandistic even, argument. But a correct and strong one for all that. Even more so over here in the UK of course. You see the misunderstanding slathered all over the arguments about markets in the NHS. Polly and all bewailing the way in which competition is going to reduce cooperation. And it doesn't matter how many times you tell them, they just cannot and do not get the point that a market transaction is a form of cooperation.

And a further little observation about the UK and this emporiophobia. I wouldn't want to have to prove this but I am still certain that I'm right. One of the reasons the country is not reliably more free market is exactly that the upper middle classes rather model their attitudes upon those of the aristocracy of old, rather than the more ruggedly bourgeois virtues of some other countries (the US comes to mind here). And of course those old aristocratic attitudes were that there was something extremely demeaning about mere trade. One did not do it, one did not associate with those who did and one most certainly did not admire it. But trade too is simply a transaction in which people are cooperating. But I do think that this is one of the reasons why markets are (by Polly and her ilk for example) still regarded as not quite a polite manner of solving a problem, even if efficient.

View comments

In what crazed universe are used cars more valuable than new?

Written by Tim Worstall | Saturday 07 December 2013

No, I don't mean where is an 80 year old Jaguar worth more than a new Lada, rather, how badly do you have to have screwed up an economy so that the average, normal, used car is more valuable than one on the lot, never been used?

However much it is Venezuela has managed that rare achievement:

The premise may leave car enthusiasts in other parts of the world scratching their heads, but vehicles actually gain in value in Venezuela – as soon as they're driven off the new or used lot. Shortages and government-mandated currency controls have led to higher preowned car prices, as many consumers are desperate to find a vehicle.

I had thought that Chavismo was just the usual Latin American buffoonery of the Caudillo doing a bit of badly misunderstood socialism. But this sort of result makes me think that the place is far more badly run than that. So, my apologies for not paying enough attention I suppose. And this isn't something new either: I can see references to this going back to 2009 at least.

But in a move to protect consumers, Venezuela's National Assembly has sought to throw the brakes on soaring car costs. Last month, a bill was passed that, if signed into a law by President Nicolás Maduro, would attempt to regulate both new and used car prices, levying hefty fines and even jail time on venders who don't comply with government-approved prices.

That's really not going to help now, is it?

I am left just to boggle at the idea that cars rise in price as they drive off the dealer's lot. The only other time I've seen this was in the Soviet Union where you knew that if a car had been running for a couple of months then it was likely better built than the ones still on the lot.

View comments

Bastiat and green policy

Written by David Homer | Saturday 07 December 2013

Nineteenth century French economist Frederic Bastiat described the government as “that great fictitious entity by which everyone seeks to live at the expense of everyone else''. This quote may give some insight into the present state of the debate about energy policy in the UK.

The pollsters tell us that the public are in favour of green subsidies and green technology. Reducing our greenhouse gas emissions is seen to be important and worthwhile. But there still seems a large section of the population who think that somehow the big 6 energy companies could or would subsume any additional costs from green energy rather than passing them back to consumers, or that the government would make up the difference.

Evidence seems to suggest that the energy market is reasonably competitive, with margins no higher than other comparable industries, meaning the firms wouldn't absorb the cost—if they did, the public would suffer anyway through their pension funds. And the hope that government could make up the cost ignores the central truth that the government has no money of its own, not due to the economic crisis not but because the state can only ever spend and distribute our money. A case in point is the government recently "lowering" our bills by putting the costs of the social levies into general taxation and away from power. This may or may not be a fairer way of spreading the cost of a greener future, but it doesn't magically make the cost of greener energy any lower.

Bastiat has more to add to our appreciation of UK energy policy. He said that good economic decisions can be made only by taking into account the full picture, by examining the full costs and benefits of the short- and long-term consequences.

Employing increasing amounts of green energy has costs. The debate is complex. But in the absence of dramatically increasing our energy efficiency and therefore cutting our energy use together with a reduction in the cost of green power production, employing low carbon technology will lead to energy prices to continue to rise. This rise may eventually be less than using more fossil fuels in our energy mix, if the costs of fossil fuels increase as many including the Department of Energy and Climate Change maintain. Nevertheless, green energy is currently expensive. Defining the benefits of employing low carbon technologies is even harder to evaluate. The UK emits a small proportion of the world's total CO2 output, and emissions are growing in the developing world. The UK's contribution may be important, but alone it cannot make a huge difference.

Whether or not the cost of reducing CO2 is worth it, we must note that it does have a cost, and it must eventually come from the public, either through taxes, higher energy bills, or lower returns to firms also owned by UK citizens. People cannot all live at the expense of one another.

View comments

Pages

About the Institute

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

Read more