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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

Err, yes, that's why we use markets

Written by Tim Worstall | Friday 06 December 2013

Via Left Outside we get this from the Brad Delong:

7) There is a valid “great stagnation” worry, but it is overwhelmingly one of institution design rather than of innovation exhaustion.And here we reach what I regard as the big issue. In the future we are going to want to spend a greater share of our incomes and attention in areas where the market system works less well: information goods, public goods, increasing-returns goods, pensions, health care, education. The market works less well in these areas. But our alternative modes of collective organization, product take some bureaucracy, not exactly cover themselves with glory in these areas either. Thus I suspect that not innovation exhaustion but rather institution design will be our big problem in keeping the pace of true economic growth going into the long-run future.

Leave aside whether this is actually true or not, that markets work less well in these other areas. I tend to think that this is incorrect, what we actually have is some areas where we don't allow markets to work because certain prejudices lead to people thinking they won't work. But as I say, leave that aside and think about what we should be doing if the second part is true. That our real problem is going to be institution design. What do we do then?

We use markets of course.

For we don't know what will be the best institutional form to solve a particular one or a set of problems. Therefore we need to experiment with different designs. Which means that we want to set up thoise expoerimental designs, alloow them to compete with each other and then see which solves the problem better. That is, a market in institutional forms.

And this is of course what we have been doing for some centuries now. We seem to have found out that a capitalist heirarchy is the best (best we have at least) method of producing whippet flanges, a rather socialist form of partnership is the best method of coralling the lawyers who deal with the legal complexities of whippet flanges and so on. For one way of looking at a market is that it is a space for experimentation, along with a method of divining which is the most successful of those experiments. Thus, if we're not sure of the best way to do something we should want to use a market to aid us.

We who call ourselves free marketeers are really only arguing one thing on top of this. Yes, we know, no market is ever truly free and we'd be entirely happy to say that we don't want to explore all possible organisational methods again. I would certainly not want to see chattel slavery on our list of experimental forms and institutions again. What we do mean by free though is freer: we simply want the experimental space to be as large as possible so that as many as possible alternatives are tested.

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Our reaction to the Autumn Statement

Written by Sam Bowman | Thursday 05 December 2013

Here were my comments on what I thought were the key points of the Autumn Statement:

  1. Raising the pension age sooner than previously planned will be unpopular, but it is the right thing to do. With an ageing population we will experience a fiscal crisis unless we raise the pensions age and, ultimately, move to a system of private pensions savings accounts so the system is robust to any demographic shifts.
  2. Borrowing has been £111bn in 2013/14, which is equivalent to £304m/day or £12.6m/hour. It’s great that the deficit is falling faster than previously (though not originally) projected, but the numbers are still staggering.
  3. The economy is recovering, but compared to this point in previous recoveries, growth is still sluggish. The Bank of England’s mandate is muddled and should be replaced with a single target to stabilise aggregate demand and return nominal GDP to the level it was growing towards before the financial crisis. This would also offset the effects of government cuts, stopping the cuts from having any negative macroeconomic impact. (Ben Southwood, Head of Macro Policy, comments further below.)
  4. The cap on total welfare spending seems like a PR stunt. It will be modified every year and doesn’t make much sense in any case: what happens if/when negative economic shocks create lots of unexpected unemployment?
  5. The development budget was heralded, but the best tool for development is letting in more immigrants from poor countries, because immigrants send money home – indeed, they sent 3 times as much money to poor countries as was sent in total official aid last year. And this is good for our economy too.
  6. It’s bizarre to give LIBOR fines to charities. It simply makes no sense. What's the connection between LIBOR and military charities?
  7. The pensions triple lock is about buying votes. Many pensioners don’t need more money and there is no real reason to redistribute wealth to them over other groups in society.
  8. Help to Buy and other expanded mortgage subsidies completely miss the cause of expensive housing. If more houses are built (increasing supply) then prices will fall. This will happen if we liberalise the planning system. Throwing money at the housing market will drive prices up and do little to increase supply. Rolling the Green Belt back by one mile would free up enough land to build one million new homes.
  9. Corporation tax is a terrible tax and, though the government’s cuts are welcome, it should be abolished altogether. Corporation tax largely falls on workers’ wages and as such it is an invisible and regressive tax on earnings.
  10. The Chancellor’s confirmation that the personal allowance will rise to £10,000 is good news, but the government should go further and peg it to the minimum wage rate to reduce the tax burden on the working poor and help to make work pay.
  11. Cutting employers’ National Insurance contributions for workers under 21 is a good move and highlights the cost of employer NICs to jobs. Employer NICs are a jobs tax and the government should be aiming to abolish them altogether.
  12. Ultimately, there was no mention of reform to planning, immigration or monetary policy – the three things most important to Britain’s economic prospects. The Chancellor has done a good job at balancing the books but he should look to making significant structural reforms that would really get the country booming: liberalising planning to allow hundreds of thousands of extra homes to be built; scrapping the net migration cap to allow talented immigrants to work here and fee-paying foreign students to study here; and giving the Bank of England a new mandate to target Nominal GDP to ensure a stable macroeconomic environment.

Ben Southwood, Head of Macro Policy at the Institute, also commented:

"It's understandable, now that the economy looks finally to be recovering, that the chancellor has moved his focus away from monetary policy, but it's also worrying.

"Economies can absorb financial crises but they cannot absorb inconsistent monetary policy and massive drops in demand. We need George Osborne to change the Bank of England's remit, requiring it to stabilise demand according to strict rules.

"A rule-based monetary policy will stop the economy from overheating into unsustainable booms, and dive-bombing into harsh recessions."

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Introduce school vouchers and liberalise free school creation to improve UK education

Written by Blog Editor | Thursday 05 December 2013

As Britain faces dire PISA education rankings, the government should liberalise the free schools application process and give parents a voucher for a place in any approved school, state or private, says a new research report from the Adam Smith Institute and the Centre for Market Reform of Education. (School Vouchers for England: Harnessing choice and competition for greater quality and equality in education. Executive summary here.)

The move would abolish the restrictions that prevent poorer parents from accessing England’s best schools. Proximity-based admissions should be scrapped, being replaced by lotteries and subsidised transport in cases of oversubscribed schools.

At a time when many areas will face a 20% shortfall in places by 2015, urgent and cost-efficient action is required, the report says. Parents may be left without schools to choose from unless the government accelerates the development of new free schools.

The government therefore must simplify the school creation process, says the report, cutting through red tape and introducing a voucher system so that parents can signify where and how they require schools to be built.

Gabriel Heller Sahlgren, co-author of the report and Director of Research for the Centre for Market Reform of Education, said:

“Parents are currently restricted to choosing schools they can afford or the schools they can afford to buy a house near. Giving parents a voucher, redeemable to all state schools and participating private schools, would usher in a new era of social mobility and reverse the decline in the quality of English education.

“A voucher programme would expand the number of schools that parents could choose. Parents could choose participating private schools, which would be incentivised by the prospect of a more steady income. The resulting increased competition between schools to attract pupils would cause significant improvement in education.

“Good schools in sparsely populated areas would be incentivised to expand by receiving more pupils and money. Similarly, bad schools would be incentivised to improve by the threat of losing pupils, and therefore funding. A voucher programme would avoid the need to build more costly free schools, as well as the huge costs and regulations surrounding which have hampered the government’s education reforms."

Notes:

A copy of the paper is downloadable here: http://www.adamsmith.org/sites/default/files/research/files/Voucher%20pa.... An executive summary of the paper is downloadable here: http://cmre.org.uk/uploads/publications/Voucher%20exec%20summary.pdf.

Please contact Alexander Blackburn to arrange an interview with the paper’s authors by calling 020 7799 8903 or 07400 902 290, or emailing ablackburn@cmre.org.uk.

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There really is a Laffer Curve you know

Written by Tim Worstall | Thursday 05 December 2013

That there really is a Laffer Curve is obvious: tax rates of 0 and 100% raise no revenue, revenue is raised at points in between. The precise shape of the curve is of course a matter for more debate. But as the Spectator has just pointed out, and as should be general knowledge but sadly isn't, the people who face the highest tax rates in this country are the working poor. Which is, of course, entirely ludicrous.

So the same low-paid job will be worth far, far more to a Romanian than a Brit on benefits. That explains why so many foreign workers are happier, keener, more likely to apply – they actually get to keep all of the extra money they earn, while Brits have to sacrifice up to 84 per cent of it. Again, who’d be all zip-a-dee-doo-dah turning up at work when you keep just 16p in every pound you earn? Certainly not me. So there is nothing lazy about Brits. The problem lies not with our people, but an still-unreformed welfare system. Iain Duncan Smith’s revolutionary Universal Credit would lower the top rate of effective tax to 65 per cent – still too high, but a vast improvement. When it’s up an running, the Chancellor should say in every budget what this top rate would be, and aim to lower it to 40 per cent. The top rates of tax in this country are not paid by millionaires. They’re paid by the millions who are caught in a welfare trap. That’s why the Romanians spot such an opportunity here. And that’s why IDS’s Universal Credit cannot come fast enough.

Universal benefit will be better, yes, but not sufficient to take us down to more sensible levels of the discouragement of work.

The first part is that we've got to, as we here at the ASI have been saying for years now, take those working poor entirely out of the income and NI tax systems. I prefer a tax allowance (which would include both types of NI) pegged to the minimum wage. Madsen has proposed a higher, £15,000 a year allowance. My proposal is based on the political resonance of tying those two numbers together of course, not on the economics.

That is, as far as I can see, the only thing that will get that combined tax and benefit rate down to something more reasonable, like that 40%. And if we want to drive it down again we'd have to become very radical indeed, move to a citizens' basic income. Here's £7,000 a year or so for each and every adult, untaxed, and that's it. That's the welfare state in its entirety. That would drive that tax and benefit rate down to zero and I think people would be very surprised indeed at the sort of change in behaviour that sort of supply side change would create. Rather than an increase in leisure I would expect a huge increase in hours worked actually.

But the real point is that if we do want to free the working poor from tax rates that we consider entirely unacceptable for the richer among us then those are the sorts of changes we're going to have to start making.

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There is no great stagnation

Written by Tim Worstall | Wednesday 04 December 2013

Given my advancing age and the near certainty that I'll have some form or amount of prostate cancer before I shuffle off this mortal coil, for almost all men do, I'm rather glad to see this little piece of technology. It's a robotic arse, doctors for the training of.

Dr. Lok: The image shows a medical student practicing a prostate exam on a virtual patient. The virtual patient prostate exam simulation is designed to help students practice and reduce anxiety with intimate exams. In the experience, the student talks to a virtual person and is able to practice their communication skills. The students can conduct a realistic prostate exam on the plastic mannequin. The mannequin is instrumented with force sensors that can measure where the student is examining and with how much pressure. This enables the system to provide a realistic encounter with a virtual patient that includes communication and physical exam components.

Intimate exams (including the clinical breast exam and prostate exam) are extremely high stakes and high impact scenarios for medical students. However, currently there are few tools to enable the practice and acclimation to what are very anxiety generating interactions. Currently, students receive minimal practice and interaction in intimate exams due to the high cost for training and high anxiety nature of the exams.

So our research group has spent the past 4 years exploring whether we can improve medical students preparation and performance in intimate exams using simulations, such as the one seen in the photograph.

Now you might think that I'm posting about this just so that we can all have a good snigger and you would, of course, be correct.

But there is an economic point here which is that GDP isn't the be all and end all of our economic system. Having medical students trained so that they can indeed perform these intimate examinations with some modicum of empathy is not something that turns up in GDP figures but we can reasonably assume that said training makes the world a better, happier place.

And there's one more little bit too: the difference between how much better off we are as measured by GDP and how much better off we really are increases over time. Simply because the two methods of measurement are diverging. Looked at purely by GDP the English lifestyle got about 8 times better in the 20th century. But there are entirely sensible and serious economists who would argue that life as it is lived got 50 to 100 times better in this same country over this same period of time. All as a result of the improvements in things that just don't get measured by GDP.

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This is not an IQ test

Written by Ben Southwood | Tuesday 03 December 2013

Boris Johnson's recent CPS speech, which among other things discussed intelligence and inequality, has caused such a storm that David Cameron and George Osborne were forced to distance themselves from his comments. There is an interesting point to be made about how distressingly and obnoxiously ugly this "everything is offensive" aspect of modernity is, where people are punished for neo-blasphemy either by the mob, or even by laws against heresy. These heresies needn't be correct, and indeed can often be repellent, but the manner of their repression is so depressing and generally grim. But I don't want to make this point. I don't even want to talk much about how misguided the IQ ignorers are, as Tom Chivers has already made this point, in his excellent Telegraph blog post.

Instead I want to just point out how different the "IQ test" (three trick questions) Boris was given live on LBC radio was to an actual intelligence measure.

"A man builds a house with four sides of rectangular construction each side with southern exposure. A big bear comes along. What is the colour of the bear?"

Supposed answer: white, because you can only have four south-facing walls if you're in the Arctic.

 "Take two apples from three apples and what do you have?"

Supposed answer: two, because you've taken two apples.

 "I went to bed at eight in the evening last night and I wound up my clock and set my alarm to sound for nine o'clock in the morning. How many hours sleep did I get?"

Supposed answer: one, since wind-up alarm clocks do not discriminate between am and pm.

These questions are ridiculous, meaningless ambiguities and the third one might even be incoherent (how can you wind it until 9am if it doesn't recognise the distinction between am and pm?). I'd guess they are more likely to test knowledge of the questioner's intention than anything like g (what scientists in the field call general intelligence).

Have these people seen any actual IQ tests that are used in real research? For example Raven's Progressive Matrices, where one must discern a pattern from matrices of simple diagrams, or any of the many different tests used in Wechsler's Adult Intelligence Scale, or for developing minds, Wechsler's Intelligence Scale for Children.

Funnily enough, I highly suspect that the correlation between answering those "lateral thinking" questions and life outcomes is much weaker than that between IQ measured on the WISC or WAIS. And this linkage, which articles in the Guardian and Observer have not so much disputed (though letters have) as attempted to associate with badness (see Andrew Rawnsley here), is pretty important. In fact, it usually trumps upbringing when it comes to children born out of wedlock, income, number of weeks worked and many other indicators of well-being. Noticing these, and not condemning greed as Worse Than Hitler (TM) should not make Boris himself Worse Than Hitler (TM).

And I didn't even mention what brave and good policies London's mayor has on housebuilding, migration, and London transport!

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On that German legalisation of prostitution thing

Written by Tim Worstall | Tuesday 03 December 2013

A ouzzling little thought prompted by this piece which is describing the campaign to make prostitution illegal again in Germany:

They argue that Germany's experiment with liberalising prostitution has failed spectacularly, turning the country into "the bordello of Europe", with more and more brothels popping up near the border. The 2002 law was trying to make sex work a job like any other. But currently only 44 sex workers in Germany are registered with the national insurance scheme. Social workers say that most prostitutes cannot afford the luxury of putting aside money for a health insurance policy.

Here's what puzzles me. Traditionally we have noted that prostitution pays higher wages than other forms of earning a living. Gary Becker has pointed out that there is a loss of social capital for those who work in the trade as one example. Most of us also think that it's not exactly pleasant (from either side of the trade, most men don't and most women wouldn't) which would indicate higher wages are paid in order to get people to do the work. But here we have a claim that most women working in this now legal profession aren't making enough money to even afford health care insurance.

Which leaves us with something of a puzzle. For that would certainly seem to indicate that the wages are not high. The only way out of this puzzle is that the supply of women willing to do this work must be reasonably high relative to the demand for this sort of work to be done. That's the only way, in something as obviously free market as this, that we can explain those low wages.

But that then brings us to another problem. If there's a decent supply of women entirely willing to do this work then why on earth should anyone try to make it illegal? It might well be that I or you don't wish to do this work. But we don't like Simon Cowell either but some millions do: so why should we take it upon ourselves to stop people doing what they seem quite happy to do?

If prostitution were very highly paid work then that would be an indication that there needs to be a serious incentive to overcome the reluctance to do the work. But low wages do indeed indicate that there's sufficient people who don't really mind at all. At which point we've got to ask why we should be trying to make illegal what consenting adults appear quite happy to be doing?

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Chart of the week: French economic sentiment a cause for concern

Written by Gabriel Stein | Monday 02 December 2013

Summary: French economic sentiment highlights causes for concern

What the chart shows: The chart shows the European Commission’s Economic Sentiment index for France and Germany

Why the chart is important: Recent French data highlight that France is in danger of missing out on the euro area recovery – such as it is. Some numbers are improving, eg unemployment and household consumption of manufactured good. But this improvement is minimal. Admittedly, so too is the deterioration in other series, eg the economic sentiment index. But it is worrying that the weakness is broadly based – four of the five sub-indices showed falling confidence in November – and also that it is there at all at a time when the rest of the euro area is showing some improvement. France is also very much looking like missing out on the general EA foreign trade improvement. One key problem is that successive French governments did little or nothing to reform the economy over the past ten years. What makes this even more worrying is that the current government is, if anything, undoing even the small reforms that have been implemented, hinting that French growth will underperform that of other EA countries over the medium-term as well.

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Both China and the UK are less unequal than many think

Written by Tim Worstall | Monday 02 December 2013

I've long been of the view that inequality is overstated in the UK. For the very simple reason that we measure it by incomes and not by consumption. But of course, if you really are worried about inequality it must be inequality of consumption that you are worried about. And I've also long thought that UK inequality is likely to be much more overstated than the inequality of most other European countries. For our economy is dominated by London in a manner that no other European country is dominated by just the one city. The mechanism here is of course that London property prices are hugely higher than they are elsewhere in the country. And so are London salaries: but that second gets recorded as inequality of income when that first means that that is pretty much evened out by the equality of consumption of housing possible for that greater sum.

Sadly I've not seen any research that details this for the UK. But here's a nice paper that worries away at the same problem for China. Yes, China is unequal, more so than the UK or US. But they look at the variability of housing prices across the country and then take that into account when comparing the variability of incomes. And quite a bit changes:

The overstated inequality if using nominal income data is not as great if inequality is measured with the Gini index (in Figure 2, both the Theil and the Gini have been scaled to equal 1 for real inequality at provincial level). Nevertheless, not deflating for spatial cost of living differences still causes an upward bias in the Gini coefficient of 15-16%. Taking an average of the results for the two inequality measures, in round figures approximately one-quarter of apparent spatial inequality in China disappears once account is taken of cost of living differences, where these are just coming from house prices.

If, as they surmise could be true, the differences in housing prices represent a general change in non-tradeable goods prices then the reduction in the Gini measure of inequality would be greater.

Which brings me back to the UK. We do have high inequality in the UK as compared with other European countries. But I'm convinced that some of this is the effect of the much higher incomes available in London. And those higher incomes are rather offset by the higher costs of living in London: meaning that consumption inequality is a great deal lower than everyone thinks it is.

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Yet more nonsense about corporation tax

Written by Tim Worstall | Sunday 01 December 2013

Yesterday I was muttering about how the lies being told about corporation tax were bending the minds of even respectable establishment figures. Today I find that we've a similar problem whereby we've some deeply uninformed commentary on the tax paid or not paid by Thames Water.

Thames Water sparked fury yesterday when it announced it will not pay corporation tax for up to a decade. Britain’s biggest water supplier has already been berated for racking up more than £1billion in unpaid taxes. But as it reported soaring profits after the summer heatwave, finance director Stuart Siddall said: ‘It will be seven to ten years until we pay tax.’

Hmm. Why is this then?

Thames Water can delay tax payments under government rules as it invests large amounts on new pipes and sewers. Its planned £4.2billion ‘super-sewer’ under London means it will not be due to pay tax for years.

Ah: the complaint is therefore about an obvious and essential part of any tax system that is trying to tax profits. Which is, of course, that you only try to tax profits. Which produces a problem when someone invests in something.

That problem being that you've got to have some method of making an allowance for what has been invested. Say, just for the sake of argument, that £1 billion is invested in something. And there's £100 million in "profit" coming from that investment. can we then decalre that that £100 million is the profit that we should be taxing? Well, no, we can't, because someone has had to put that £1 billion in at the start. That's a cost: there's no real, economic, profit until that £1 billion has been paid back first. Only then, after the costs of doing whatever it is have been paid is there in fact a profit that can and or should be taxed.

There are various possible methods of doing this, making this allowance, and the law as decided by Parliament does so through the use of capital allowances. Leave aside the details of how it works but this is what is being done. Ensuring that it's only actual profit that is taxed, not the repayment of the initial investment.

And do note again that there has to be some method like this in the tax code: without it there would be very much less investment. And what worries is the following:

Labour’s Margaret Hodge, chairman of the Commons Public Accounts Committee, called it ‘deeply unfair’, saying Thames Water – which is owned by an Australian consortium – had an ‘obligation to pay their fair share in tax’. Tax accountant Richard Murphy, who helped expose tax avoidance by Starbucks, said: ‘The reality is that much of this will never be paid. ‘They are never going to stop spending money on infrastructure, which means they will probably never pay tax. Companies like this have to say when and if they will ever pay tax.’

At least one of these two knows all of this but is still wibbling nonsensically about it. And at least one of these two has also been calling for more infrastructure investment as a method of getting the economy growing. So to complain about the tax structure that encourages infrastructure investment does seem a little odd.

But to my larger complaint. We're being told an ever more fantastical series of tales about tax absolutely none of which have any grounding in reality. There is no possibility of having a tax system on profits that does not make an allowance for investments made. So why is there this spreading of fear, uncertainty and doubt about the tax system which makes this essential allowance?

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