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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

A visit to the happy world of Will Hutton

Written by Tim Worstall | Monday 11 November 2013

As ever, Will Hutton gives us a glimpse into that happy world where more government is the solution to everything. Here it is to the lack of innovation which supposedly pervades our economy:

Inventive startups need big corporations to invest in and support them, but too many in Britain are foreign owned or obsessed by their share price and directors' remuneration. We need a state that can unleash visionary innovative initiatives at scale rather than preach endless austerity.

I'm afraid this just doesn't work and to prove it allow me to give you an example from my own working life. Over here in the Czech Republic they've got some EU money to throw at innovation. Mixed industry and academic sorta stuff and we've a couple of projects that fit into their desired categories well enough. So I had a pint with someone who knows how to apply for these funds: heck, if there's free money out there why not? The first deadline for applying is 22 of this month. The actual cash would be available, assuming we passed all the hurdles and tests, in May 2015.

Yes, 2015: and no, this is not how innovation or start ups work. 18 months is in fact the entire lifecycle of an innovative start up these days: Instagram was bought for a billion dollars in about half that time from starting to purchase.

The world simply moves to quickly these days for the state processes to be able to help with innovation. Sure, it might have been different when industry moved in rather slower c ycles (although the record of government supported entrepreneurs is not all that good even from those times) but it would be completely absurd these days to try and have the state doing anything other than just getting out of the damn way of innovation.

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Equal pay day comes around again

Written by Tim Worstall | Sunday 10 November 2013

Apologies, misogynist that I am I missed this last week when we were supposed to commiserate about Equal Pay Day. That being the day of the year when women stop being paid given that they earn so much less than men. There is really one one minor problem with this idea which is that we don't in fact have a gender pay gap in either the US or the UK. We have, as I've said many a time, a motherhood pay gap instead. And no, given that not all women are or will become mothers that is not the same as a gender pay gap.

Depressingly, we've all known about the gender pay gap for far too long. 40 years and counting. And yet here, on this special annual Day, we're all still talking about the same old issues: one, we need a culture change; two, we need more flexible working; three, we need greater transparency; four, companies should publish their gender pay gaps; five, large and small businesses should understand the business case for employing more women ... I could go on.

40 years ago we most certainly did have a gender pay gap. Women were directly discriminated against in their pay, their education and even their taxation (it wasn't until the late 80s that a woman was, finally and rightly, considered as a taxable economic unit separate from however she decided to run her love life). But that has all now changed.

Women who work part time earn more than men who work part time. Women in their 20s earn more than men in their 20s. Women who don't marry and don't have children earn more than men. What kills the average wage of all women, in comparison to the wage of all men, is that women, and it's important to note that this is on average, take career breaks to have children and often then either more time off or lighter workloads to raise them.

We might want to say that this isn't a good idea. We might think that it's just fine that people who make different life decisions earn different amounts of money. But what this isn't is a gender pay gap. And anyone who wants to change matters has to recognise that it isn't a gender pay gap so it isn't something that is going to be changed by blathering on about gender.  It's about children and the having of them. And, if we're to be honest about it all, as long as more women than men decide that they want to take those breaks and changed workloads in order to raise their children then we're always going to have that motherhood pay gap.

Whether it's a good or bad thing is entirely reliant upon your personal definitions of good or bad. But could we all at least recognise reality?

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Despite what WRAP tells us we do not throw away food worth 12.5 billion each year

Written by Tim Worstall | Saturday 09 November 2013

Another year and another report from WRAP telling us that we're all throwing away food worth some vast sum:

4.2m tonnes of avoidable food and drink waste was thrown away by UK households last year - worth £12.5bn - according to the latest report by the Waste & Resources Action Programme (Wrap).

Sadly for us who have to listen to this nonsense, even more sadly for those of us as taxpayers who have to cough up for those writing this nonsense, this is not true. No, not even as they put it in their actual report:

This new report contains some remarkable findings. It reveals that the amount of food and drink thrown away that could have been eaten fell by 21% between 2007 and 2012. However, it also shows the sheer scale of the food and drink still being wasted in UK households – 4.2 million tonnes of avoidable food and drink is wasted each year, worth £12.5 billion.

The weight of food thrown away they may well be correct about. But the value they're obviously entirely wrong about. For the obvious reason that if it were worth 12.5 billion then we wouldn't throw it away, would we?

It is possible that 12.5 billion was originally spent upon the food that is subsequently thrown away: but that still doesn't mean that what is thrown away is worth that sum. Just to take one example, perhaps you sometimes like to have seconds and perhaps sometimes you don't. So you always over cook by, say, 25% to give yourself that option of having or not having another little helping. This is your money being deployed in the manner you wish it to be: that some of that now cooked food ends up in the waste stream does not mean that you've wasted your money. It just means that your utility is maximised by your always having that opportunity to have seconds whether you actually take it or not. We can think of any number of further details like this: perhaps the option of having a meal in the fridge is worth the cost even though you then decide to eat out. Or that fifth pint of the evening convinces you to drag a burger back from the pub rather than risk a chip pan fire by cooking?

These are not wastes of your money: simply and exactly because this is how you decide to deploy your available resources. They may not be the deployment methods that WRAP thinks you should be using but then who let those prodnoses describe what we should all be doing anyway?

And of course there is the irrefutable point that if we all bundled this "wasted food" up and sent it off to WRAP they most certainly would not pay us 12.5 billion for it, would they? Therefore it cannot be worth 12.5 billion, can it? For in a market system something is only worth what someone else will pay for it.

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Now this is how you value a company

Written by Tim Worstall | Friday 08 November 2013

Finally we've got someone valuing a company, a producer, in the correct manner. Which isn't by the amount of tax the company pays (no, sorry Margaret, Lady Hodge, it simply isn't), nor by the number of people it employs and most certainly not by either the stock market valuation nor turnover of the organisation.

No, the greater value of a producer is what it delivers to us, the consumers:

Calculating the value of search to users was a bigger challenge, and Varian pointed to a study called “A day without search engine” by Yan Chen at the University of Michigan. As a part of the study, students were hired to answer the same questions using A) Google and B) Library. Students who were using Google to find answers got the same or even better quality answers and saved 15 minutes per search. It took an average of 22 minutes for students to locate the answer using the library books, as opposed to an average of 7 minutes needed for the same search using Google. Varian calculated that Google search saves people 3.7 minutes a day which translates into $1.37, the number he got using the average US hourly wage of $22. Multiplying that with 365 days in a year, Google saves users $500 yearly. He then multiplied that with 130 million, which is the number of employed people in the United States, and got $65 billion. The total value of Google to US users adds up to more than $119 billion.

We can argue a little about those numbers, are all of those estimates correct sorta thing. But the basic method is absolutely correct: the value to us is the value in use, the utility of consumption if you prefer. Now extend those US only numbers out across the roughly 2 billion richish world people and we've got something like $800 billion or so of value delivered to consumers each year through the simple existence of Google.

I'd add another point, that the number is going to be significantly higher than this. Firstly, there's all of the other Google services that people can and do use. And secondly he's only measuring the savings in time from doing more quickly what people already used to do. But we're also able to do new and different things as a result of the company's existence.

But even if we exclude those things, even if we aren't all that happy with the detail of the valuation, we can see that the value delivered to consumers is some $800 billion each and every year. Please note that this number does not appear in any calculation of GDP. The only part of it that does is the small portion of this that Google manages to appropriate unto itself as either the wages paid to employees or profits in the bank. All the rest of that value is entirely left out of all forms of national accounting. Roughly speaking therefore there's something like $750 billion of value being delivered that while we all enjoy it no one is actually writing down anywhere.

And, as I've said repeatedly, this number is so vastly larger than whatever tax bills Google has or has not been paying as to make them irrelevant. It dwarfs their turnover, let alone their profits or putative tax bills. So perhaps we might all stop worrying so much about those tax bills? In the grander scheme of things they are tiny details.

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Bitcoin is poised to shake the world- are you paying attention?

Written by Michael Taylor | Thursday 07 November 2013

If you thought technology was already disruptive enough, here’s the news. We’re just getting started.

The Roman Rallying sequence in the Top Gear Middle East Special is an exhilarating example of the old world rubbing up against the new. As Jeremy Clarkson and Co charge around the sacred Jordan hippodrome in their battered sports cars, they inevitably start to kick up a lot of ancient dust. Clarkson starts to worry: “someone’s gonna see this dust, and then they’re gonna come, and then there’ll be anger and rage“.

There was a time when Bitcoin was able to rub up against the old financial world without anyone noticing. Now that time has gone. They’re simply kicking up too much dust to go unnoticed any more. Take the recent seminar at Stockholm’s School of Economics as a case in point. A simple two hour session featuring the current figurehead of the Bitcoin movement, Jon Matonis, turned out to be their quickest selling and most oversubscribed event in their 100 year history. But for those who know even a small amount about Bitcoin, this comes as no surprise. How could anyone resist a story involving giant stone money, gold, aliens, and the possibility of displacing some of the most significant polices of modern governments with an algorithm?

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Rare sensible move from Mario Draghi and ECB

Written by Ben Southwood | Thursday 07 November 2013

Nominal interest rates cannot be brought below zero, because non-cash assets can be sold for cash, which always effectively bears an interest rate of zero. Monetary policy affects the economy through changing nominal interest rates, which given somewhat sticky inflation changes real interest rates, which affects spending, saving and investment decisions—a cut in the interest rate makes saving more expensive and investment cheaper. Essentially working on these two facts (there are much more complex versions, but this is the core) New Keynesian economists argue there is a "zero lower bound" on monetary policy. The Fed cannot support demand by targeting a Fed Funds rate lower than zero, the Bank of England cannot support demand by lowering Bank Rate any further than zero, and the same for the European Central Bank. This means, they say, fiscal policy is necessary to stabilise demand when the interest rate that would be needed to do falls below zero.

Now I think this argument is false. Monetary policy does not mainly work through interest rates. Monetary policy mainly works through affecting consumers' and firms' expectations about future demand conditions. But even if this argument were true, the simple Keynesian story—that fiscal policy must be employed to get the Eurozone out of recession because monetary policy is ineffective at the zero lower bound—will not fly. Why? Because the ECB, headed by Mario Draghi, cut interest rates by 0.25% today, bringing them from 0.5% to 0.25%. The ECB was not yet at the zero lower bound.

Monetary policy doesn't seem to need long and variable lags of the type typically assumed in models. As I write, the Euro is down 1.4% against the dollar 1% against the pound and 0.7% against the yen. The Bloomberg 500 measure of European stocks is up 1% and the Euro Stoxx 50 measure is up 1.3%. That means the value of the Euro has already fallen. That means that money is already slightly easier. If there were a good measure of nominal income expectations—the best definition of money easiness or tightness—I'd wager that that would be up.

It's true that this is unlikely to be enough. Nominal GDP is not growing at pre-trend rates, never mind catching up to the pre-recession trend. The ECB is letting the euro area slip into deflation when it is barely out of its double-dip recession. Sovereign debts have grown to eye-watering levels despite very tight fiscal policies in many of the hardest-hit member nations. And none of this is to mention the excessive regulation and badly-designed tax systems that contribute to low long-run productivity growth and high rates of unemployment even in good times. But it's both a step in the right direction, and evidence against the simplistic Keynesian arguments that get trotted out all too often in macroeconomic debate.

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Woo time on tax poverty

Written by Tim Worstall | Thursday 07 November 2013

Yes, it's still tax poverty week and the claims about moving from the current minimum wage to the living wage are coming in thick and fast. The latest piece of woo on offer is this:

Unlike previous research, today’s Landman Economics Report looks at what would happen to the jobs market as a result of the stimulus to the economy from raising the pay of millions of low paid workers to the Living Wage. More people spending money in local shops and a reduction in the amount the government needs to spend on in-work benefits. The report finds that, when you take this into account, shifting the NMW up to the Living Wage could create an extra 58,000 jobs.

Howard Reed manages to reach this amazing conclusion, that raising the price of labour will lead to an increase in the demand for labour, by simply assuming away the effect that raising the price of labour will have.

For these two reasons, I have assumed here that the short-run impact of reduced profits on consumer demand is zero.

There won't be any bad effects because I have assumed in my workings that there won't be any bad effects. That's bringing the eonomist who assumes a can opener into disrepute.

I have to admit that I much prefer this point made by my fellow Fellow, Gavin Kennedy:

Employee tax payments go to the government, so removing them for the ‘Living Wage’ does no affect employment because the total wage cost remains the same, and does not have detrimental employment affects.

The argument against raising the minimum wage is that yes, there really will be unemployment effects. The argument in favour of reducing the tax bill on those in employment is that it will still increase their incomes but it will have no effect whatsoever on unemployment. Indeed, removing, as Gavin points out, the employers' NI would probably increase employment.

As before, we do not have a problem with low wages in this country, we have a problem with taxes being too high on the lowly paid. It is all a matter of tax poverty, nothing else.

And now for the ritual conclusion: if you want the lowly paid to have more money then just stop taxing them so damn much.

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The value to us of Sainsbury's is not the amount of tax that they pay

Written by Tim Worstall | Wednesday 06 November 2013

This is a slightly strange thing for a businessman to be saying:

Justin King, chief executive of J Sainsbury, has challenged business leaders to “stand up” and reveal their tax practices, arguing that “tax is a moral issue” for British companies.

The supermarket boss argued that “consumers have every right to ask” how much a company is putting back into the country where they operate and make their profits. Speaking on a panel about Business Trust at the CBI annual conference he said that he “strongly disagreed” with those - including the CBI - who have said that company tax bills should be based on the letter of the law, not social responsibility.

He told the CBI conference: “How we do business, how we put back into the community of which we are a part, put back into the society from which we draw our revenues is a moral issue and it’s one that our consumers have every right to ask us.”

How Sainsbury's put back into the society they draw their revenues from is by drawing those revenues. Their job is to be a grocer for goodness sake: to provide us with somewhere we can attain nirvana with 15 brands of baked beans and 17 of toilet paper. That's the point of them, the only point of them. If we didn't think we gained more value from their existence and services than we would from their absence then we wouldn't shop there. Thus, given that we do shop there we must value their existence and the services they provide.

And that really is the end of it I'm afraid. How many people they employ to provide these services, what profits they make, what bite the government takes out of their revenues or profits are all entirely irrelevant things. The contribution Sainsbury's makes to our society is that we have somehwere to get beans and bogroll from.

Nowt else.

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Yes, it's still tax poverty, not a Living Wage

Written by Tim Worstall | Tuesday 05 November 2013

So we've had the announcement of the new Living Wage rate: that level of income which allows a full year, full time, worker to earn and not be in poverty in the UK. That definition being, rightly, what people think people should be able to do and not be in poverty: as with Adam Smith's linen shirt.

That number that has been announced? 7.65 an hour.

But as I have been shouting for years that is a pre-tax number: that's the earnings before the State gets its grubby mitts on these paltry earnings of the working poor.

If you do work full time full year at that Living Wage rate you'll get 14,917.50 over the course of the year. I don't think that's a large amount and I'm sure that you don't either. Which is why it is so appalling that at this low level of income said Living Wage worker will be charged 1,095.50 in income tax and 1,110.00 in employees' national insurance. For a net income of 12,712.00

Compare and contrast this with the 12,304.50 that someone would earn on the national minimum wage of 6.31 an hour, if no tax were charged on it, and we can see that what we have here is not wages which are too low, it is taxes which are too high.

And of course there is also employers' NI of a further 1,100 or so: opinions differ as to how much of that is really carried by the employee, most to possibly all being the general view.

The reason that the national minimum wage is not a living wage is because government taxes the working poor too much. We do not have a low wage problem at all, we have instead tax poverty.

And, as is ritual now on this point, if you want the working poor to have more money just stop taxing them so damn much.

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Curb the ministerial credit card

Written by Ian Byatt | Monday 04 November 2013

Attention has focused on energy bills, but Britain’s water industry has its own troubles –drought orders, hosepipe bans, and tariff hikes.  The new management at water regulator Ofwat should focus on changing the counter-productive incentives that are damaging efficiency and choice.

Because companies are regional monopolies, regulation involves careful balancing between enabling companies to finance investment, and protecting customers from higher prices. It’s now time to tip the scales: the drive towards attaining ever-increasing water and environmental quality at an ever-increasing cost must come to an end.

Following reductions in real incomes, the 2014 Ofwat price review should set below-inflation price limits that would give nominal stability to the tariffs paid by customers.

The focus on environmental improvement has driven up costs for consumers and choked supply. Massive investment has been financed by rising tariffs. Now it is time to intensify the search for more cost-effective – and less capital intensive – methods.

Ministers have treated regulatory financing arrangements as an environmental credit card, with too little concern for those paying the bills. Take the Thames Tideway – a major new sewer under the Thames at an estimated cost of £4bn, the need for which may arise from neglect of sewer maintenance. The objectives of dealing with storm water could be dealt with much more cheaply than by a grandiose tunnel project.

More use should be made of markets. Retail competition – along Scottish lines - should be extended . There should be more trading of raw and bulk water, including supplies from independent providers.

Existing company networks should be linked to enable water to be transferred, by trading, from the water rich North to the thirsty South, reducing the incidence of hosepipe bans, giving choice to customers, and incentives to companies. Extension of metering should be linked to the use of pre-payment devices that would reduce bad debt by helping customers to budget for their water bills.

And water companies, especially when private equity owned, need to improve their governance: footloose global money has now acquired ownership, and should behave more responsibility to its customers.

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