"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
Madsen sets out on his own site what should be the agenda for the second half of this coalition government. In a speech to York University Conservatives he lists a programme that might reasonably be implemented by the coalition. It's radical stuff, starting with combining income tax and National insurance and moving on to allowing profit-making free schools and privatized universities, with a dash for gas along the way, and the removal of the cap on skilled immigration:
The first half has been dominated by the need to rescue the nation’s finances from the disastrous black hole into which Gordon Brown and his Labour government had sucked them. The second half should stress essential reforms and a pro-growth agenda. I set out a programme that might just fall within the range of what the coalition might be able to put through.
You can read the whole thing here (and it's quite short).
In a new Adam Smith Institute report released today, statistician John C. Duffy and ASI fellow Christopher Snowdon assess the Sheffield Alcohol Policy Model, the basis for minimum alcohol pricing policy. Their findings are summarized here:
1. The Conservative Party and the Scottish National Party have both stated their intention of introducing a minimum floor price for alcohol, levied at around 50p per unit. Advocates of minimum pricing claim that the policy will significantly reduce alcohol consumption and the problems associated with hazardous drinking.
2. Estimates of how minimum pricing will affect health outcomes have overwhelmingly come from a single computer model—the Sheffield Alcohol Policy Model. This paper argues that the model is based on unreasonable assumptions which render its figures meaningless.
3. Amongst the problems with the Sheffield model is its false assumption that heavy drinkers are more likely to reduce their consumption of alcohol as a result of a price rise. Its calculations are based on controversial beliefs about the relationship between per capita alcohol consumption and rates of alcoholrelated harm. Its assumptions about the relationship between price and consumption have frequently been refuted by real world evidence.
4. The Sheffield model provides figures without estimates of error and ignores statistical error in the alcohol-harm relationship. Data is drawn from different populations and applied to England and Scotland as if patterns of consumption and harm are the same in all countries. When data is not available, the model resorts to what is essentially numerology. Insufficient data is provided for the model to be recreated and tested by third parties.
5. The model ignores the likely effects of minimum pricing on the illicit alcohol trade, it disregards the health benefits of moderate drinking and fails to take account of the secondary poverty created by regressive price rises. The decline in alcohol consumption seen in Britain in recent years has not led to the outcomes predicted by the model.
6. We conclude that predictions based on the Sheffield Alcohol Policy Model are entirely speculative and do not deserve the exalted status they have been afforded in the policy debate.
We're all well aware of Polly Toynbee's mantra that "We should be more like Sweden". I'm sure at least some of you will be aware of the various times I've made fun of that very mantra. What, you mean we should privatise the fire and ambulance brigades? Have a pure school voucher system? Charge people a (nominal) sum for a doctor's visit? Have a state financed and multiple providers health care system? Switch the national dish from roast beef to meatballs?
While I do have fun with making such japes there is an important underlying and usually unacknowledged point to be made. Sure, we can look at Swedish childcare and say that's not so bad (or is, to taste). Or births outside marriage and see that they don't cause the fall of civilisation. But looking at only such things andnot at the deeper structure of the society can make that a very dangerous method of comparison. As one of my favourite up and coming economists points out here:
In a responce to Ross Douthats thoughtful column, Krugman writes “In Sweden, more than half of children are born out of wedlock — but they don’t seem to suffer much as a result, perhaps because the welfare state is so strong. Maybe we’ll go that way too. So?” This is highly misleading. In secular Sweden, family traditions differ from those of the United States. Cohabitation (“samboförhållande”) is formally recognized and treated by the law as virtually identical to marriage. Swedish couples typically cohabitate, get children and only then get marry.
Statistics Sweden explains: “Living together without being married has long been common and majority of the children born in Sweden are born out of wedlock, but usually cohabiting, parents. Cohabitation can in many respects equated with being married, and young adults has been widely accepting of couples with children remaining unmarried. Despite this, most couples choose to married eventually.
Of the couples that are followed in this report and still lived together at the end of 2010, 73 percent married, while 27 percent were still cohabitating….About 10 percent of couples did not live together when the child was born, but most of these couples have lived together before or after birth. Approximately 3 percent of all couples never lived together and had a child outside of a relationship.”
There's a very large difference between couples living together and having children without a church or state sanctioned piece of paper and people being single parents from the get go. A society in which that true single parenthood is rare will be different from one where it is common. And this isn't to say that that true single parenthood is either good or bad: only that it is indeed different from non-married coupledom.
The point being that we cannot look at a socially extremely conservative country like Sweden and then import a system wholesale into a much more socially liberal one like the UK. Well, we can of course and to some extent that's what a large number of people are campaigning for. But it's not going to work the same way at all: because the underlying attitudes are different. And this doesn't just apply to the UK and Sweden either. We can't, wouldn't, import the US attitude to guns, imprisonment or race either.
Another way to put this is that sure, many systems to do many things work in many other countries. But the important thing to work out, before trying to adopt them, is why do they work in those societies? Only once we've done that can we even attempt to work out whether they would work in our own, rather different one. As an example I offer you this thought: Britain, and certainly England, has always been rather more individualistic than much of the rest of Europe. So why does anyone think that simply importing a foreign communalism will work here?
One of the odder little corners of economics is development economics. It seems to be where bad lefty ideas go to be imposed on poor people after we've found out they don't work for us. As an example I would offer some of the witterings of Ja Hoon Chang: he says that free trade might be a good idea for rich countries but not for poor. Much better that they have a benevolent government planning everything and fostering infant industry protection and the like. You might then mention the socialist calculation problem: but, but, economies are just too complex to plan, no one can ever have the right information!
To which a standard (not Chang particularly, at least not so far as I know) response is that well, rich economies are indeed complex. So knowledge is very difficult as you say. But poor economics are really simple so planning can be done. So Yah Boo Sucks baggsie me the job as Minister of Planning (or his highly paid expat adviser at least). Which is just lovely until you try to calibrate this idea against the real world:
Two years ago Ghana's statistical service announced it was revising its GDP estimates upwards by over 60%, suggesting that in the previous estimates about US$13bn worth's of economic activity had been missed. As a result, Ghana was suddenly upgraded from a low to lower-middle-income country. In response, Todd Moss, the development scholar and blogger at the Center of Global Development in Washington DC, exclaimed: "Boy, we really don't know anything!" Shanta Devarajan, the World Bank's Chief Economist for Africa, struck a more dramatic tone. In an address to a conference organised by Statistics South Africa, he called the current state of affairs "Africa's statistical tragedy".
It's worth reading the whole of that piece. Yes, I know it's about economics, I know it's in The Guardian, but it's still worth reading. Nigeria, for example, has spiffed up its statistics and is expected, as a result, to double its estimate of GDP. And this is the sort of information environment in which people say that economic planning can be done? One where we're missing 50% of the entire economy from our numbers?
Which leads to an interesting conclusion. They've already agreed that rich economies shouldn't be planned because the knowledge problem. But that knowledge problem is worse in the poor economies: only the rich ones have enough cash to splash on actually collecting even halfway reliable data. Therefore no economies should be planned.
In an old piece for the Freeman, Steve Horwitz writes about 'Say's Law', named after the classical French economist Jean-Baptiste Say who coined it. Say's law is commonly — and, says Steve, wrongly — thought of as stating that 'supply creates its own demand'. That's a little nonsensical. In fact, what he said was that the source of demand is production: unless you have something to offer on a market, you aren't really 'demanding' anything else:
Hutt states this as: “All power to demand is derived from production and supply. . . . The process of supplying—i.e., the production and appropriate pricing of services or assets for replacement or growth—keeps the flow of demands flowing steadily or expanding.” Later, Hutt was to be somewhat more precise with his definition: “the demand for any commodity is a function of the supply of noncompeting commodities.” The addition of the modifier noncompeting is important. If I sell my services as a computer technician, it is presumed that my resulting demands will be for goods and for services other than those of a computer technician (or something similar). The goods or services competing with those that I sell can always be obtained by applying my labor directly, so I am unlikely to demand them. The demand for my services as a computer technician is a result of the supplying activities of everyone but computer technicians.
On the New Statesman blog today, David Skelton of Policy Exchange argues that “We must free ourselves from the tyranny of the credit rating agencies”. Citing the failure of the big three ratings agencies (Standard and Poors, Moody’s and Fitch) to anticipate the subprime mortgage crisis, he says that the agencies now “hold enormous power over democratically elected governments … often enough to force a government turn away from the democratic mandate on which they were elected.” Because they’ve been so badly wrong before, we should “stop thinking that their declarations should be decisive”.
I think Skelton has missed the most important point. He asks whether the "anonymous, powerful experts deserved the credibility and the exalted position they are given by the media and politicians?", apparently unaware of the fact that the ratings agencies owe their position not to media (or even politicians') trust, but to a complex thicket of US financial regulation.
As Professor Lawrence J. White of Stern Business School has written, it was “the regulatory structure that propelled these companies to the center of the U.S. bond markets”, and what has stopped them from going down following their colossal failure in 2008.
In 1936, financial regulators eager to impose discipline on the banking sector introduced rules that banned banks from holding bonds rated below BBB standard by one of the “recognized ratings manuals” – S&P, Moody’s or Fitch. In White’s words, “the creditworthiness judgments of these third-party raters had attained the force of law.”
Over the following decades, insurance regulators followed suit, so that eventually all fifty US states had rules requiring insurance companies to hold amounts of capital commensurate to the riskiness of their bond holdings as judged by the ratings agencies. Federal pensions regulators did the same in the 1970s.
Finally, in 1975, the Securities Exchange Commission (SEC) created a category of “nationally recognized statistical rating organizations” (NRSRO) to risk-rate the bonds that the SEC now required broker-dealers to hold. According to White: “The other financial regulators soon adopted the SEC's NRSRO category and the rating agencies within it as the relevant sources of the ratings that were required for evaluations of the bond portfolios of their regulated financial institutions.” The SEC only granted NRSRO status to four more organizations over the next 25 years, but by 2000 these had merged with the original three, once again leaving only three agencies on the market.
Whether through error or design, the NRSRO application process was remarkably opaque, with no formal application or review processes. As White argues, these regulations created (and continue to create) an enormous barrier to entry for any new ratings agency: “Without the NRSRO designation, any would-be bond rater would likely be ignored by most financial institutions; and, since the financial institutions would ignore the would-be bond rater, so would bond issuers.”
With the ratings agencies as insulated from competition as this, it is hardly surprising that they all made the same errors in the run-up to 2008. Nor is it a surprise that their market dominance has continued, despite that massive failure. It was only in 2006 that the SEC’s barriers to entry were reformed at all, and even then the reforms were limited, at best.
These facts are not well known. Jeffrey Friedman has argued that widespread ignorance of the ratings agencies’ status was a significant contributory factor in the subprime mortgage bubble – bankers were unaware that the ratings they were getting were not the product of a competitive marketplace (where risk-taking that turned out to be correct would be rewarded) but of a quasi-governmental oligopoly.
I may disagree with Skelton more broadly – when he accuses bond markets of holding governments to ransom, he is really just attacking them for being wary about who they lend to. And only governments relying on borrowing to fund spending could be forced to change policy to satisfy bond markets. But his assessment of the ratings agencies appears to miss the most important fact of all: that these agencies are creatures of regulation, not competition.
Thanks to Peter Twigg for bringing this excellent clip on the double threat to the people of big business allying itself with big government to my attention.
Those who think that all our problems can be solved by taxing the rich more would do well to study this year's tax facts mentioned by City AM editor, Allister Heath, in Tuesday's edition.
1. The top 1% of earners earn 10.8% of all income, but will pay 24.2% of all income tax.
2. The top 10% earn 33.2% of all income but will pay 55.3% of all income tax.
3. The top 31,000 individuals (earning £0.5m+) will pay £14.8bn, which is more than the £13.9bn paid by the bottom 13,600,000 people earning below £20,000 pa.
4. Those earning £0.5m+ per year pay 43-44% in income tax, plus National Insurance plus indirect taxes. The very top 2,000 earners pay on average £2m each in income tax alone.
These facts are sobering, but a real injustice comes from the fact that those earning the minimum wage (for a typical working week) have income tax and National Insurance taken out of that minimum wage. Those on minimum wages would earn a 'living wage' were it not for the money taken from them by government. It seems wrong that people struggling to get by on the minimum wage should lose some of that meagre sum to government.
I had a letter published in the Business section of Monday's Telegraph. It had to be abbreviated for lack of space, but I think the full text is worth repeating here because it explains what it is that the incoming Governor should understand.
Next month a new Governor of the Bank of England will be appointed to replace Sir Mervyn King. A suitable candidate must not only possess rare qualities, but should also understand the causes of the financial crisis in order that they might make a recurrence unlikely. They should understand that the low interest rate policy pursued by governments and central banks to smooth the down side of the business cycle produced cheap money and easy credit that fuelled a housing bubble. This was intensified by implicit government guarantees in the US to support loans to borrowers with a high default risk.
This was exacerbated by rules that required banks to take more mortgage debt, done in the name of prudence, but in fact compounding regulatory error. Added to this was the fact that the artificially low interest rates drove fund managers into riskier investments because of the low returns on the safer ones.
If the person to be chosen as Governor understands this, they are unlikely to countenance future intervention designed to secure a politically acceptable outcome rather than an economically wise one. They will be unlikely, too, to punish by a regulatory stranglehold a financial sector that was far less culpable than the politicians who tried to make it serve their interests.
Anyone who thought it was all down to greedy bankers taking reckless risks and thinks that tighter regulation is the answer is lacking in the insight and understanding we are entitled to expect from the next Governor.