A summary departure

Scraps about soft and hard Brexit smack of punch-ups between cartoon-strip antagonists more or less keen on the referendum outcome . But this masks a more subtle distinction between judgements about risk. Let us put the best face on the arguments for a gradual, possibly staged departure from the EU, including those on this site led by my good friend, Sam Bowman. These are

  • a summary departure would hurt industry and finance; 
  • our relations with the EU are too complex for a rapid departure ;
  • Northern Ireland, Scotland and the 48% would be mollified by a halfway house.

Unfortunately, however, I fear this halfway house is a pipe-dream. Brussels can’t offer a better deal on sovereignty, the number one objective of Leavers, as any concession would be demanded by other countries. And the EEA doesn’t give border security, the Leavers’ second objective, no matter how we may feel personally. In this light, the highest priority for the government becomes reducing the level of Brexit insecurity all round.

  • In the nature of things, industry and finance adjust to new conditions but both run the risk of freezing (eg hiring and investment decisions) in the face of prolonged uncertainty. 
  • The European s themselves will welcome being let off prolonged Brexit negotiation so they can turn to their many other problems.
  • A definitive outcome offers a similar balance of benefits to Northern Ireland, Scotland and the 48%. 

HMG can achieve this with a childishly simple negotiating position – a no-fault quickie divorce, by way of time-limited offers of the status quo ante

  • on goods, or failing which unilateral zero tariffs (subject to reservations for antidumping etc). The latter would make it imperative upon Brussels to reciprocate. If it were bonkers enough to fail to do so, the EU would break up as its leading members would not tolerate losing their single largest external trading partner; and
  • on services, failing which reciprocity, reminding (eg) the Quai d'Orsay of the benefits of access to the UK’s service markets for AXA, BNP, EDF, RATP and Veolia.

plus a couple of financial offers

  • a one-time only sum (in the billions) for the UK’s share of the net of pension obligations etc less tangible assets; and
  • a periodical sum (in the tens or low hundreds of millions) for Erasmus and other such motherhood and apple pie. 

The time-limited aspect of HMG’s offer should be sustained by a clause in the Great Repeal Bill empowering HMG to exercise its rights under the Vienna Convention on Treaties to bring negotiations to a summary conclusion for lack of a serious intent to negotiate by the other side. As this would leave the financial offers unaccepted, HMG would throw in payment to an escrow lodged with the BIS or the like.

HMG should be briefing international firms (American banks, the big Anglo-Dutch players, French, German and Dutch state-owned transport outfits, French quoted government contractors, Japanese carmakers etc) to the effect that if they value their operations in the UK, it is up to them to lobby the EU to respond positively. So too European exporters to the UK. Overall, however, HMG would be after an abbreviated negotiating period to minimise uncertainty and bring on dealings with third parties.

Miles Saltiel has just published a collection of thirty-odd blogs circulated to insiders during and after the referendum campaign, as “The Brexit Blogs” a Kindle e-book.

The Sunday Times' bizarre witch hunt against Airbnb

Over the past month or so, Airbnb have been the victim of a rather bizarre witch hunt led by The Sunday Times.

First, back in mid-September they accused Airbnb of engaging in underhand lobbying tactics – "Airbnb’s underhand lobbying tactics exposed - The Times, September 17". The headline sounds worrying certainly, but if you read past it, you'll notice this underhanded lobbying consists of inviting Airbnb hosts to an evening of free food and drink asking them to list a few good experiences they've had using the website. At some point in the future, they might even ask their hosts to let a few politicians know that they quite enjoy having the right to use their private property as they wish, and tell would-be regulators to get lost. It's hardly cash for questions.

Now they've gone after them again. This Sunday they published an investigation claiming "widespread abuse of planning laws by Airbnb users, allowing them to take properties out of the already squeezed housing market and turn them into money-making holiday rentals." 

Now, obviously we should enforce all of our laws consistently and predictably. But many of these rules shouldn't be on the books in the first place. They say:

"For anyone planning a trip to London, the Airbnb website offers a striking range of furnished flats, spare rooms and, in at least one case in the north London suburb of Golders Green, a converted garden shed.
Last week The Sunday Times visited the studio-shed and nine other holiday rentals in the same property listed on Airbnb. The shed, deemed unsuitable for accommodation by the local council, was on the market for £50 a night."

Now, if this shed was unsafe and unpleasant, the host would likely get a bad rating and while £50 a night is relatively cheap for London there are certainly other options for would-be travellers. What I suspect has actually gone on is that the host has built something perfectly liveable, but not bothered to get the requisite sign-off from the council. Rather than crackdown on the host, we should follow the lead of Sweden where small houses (no bigger than 15sq m) can be built without planning permission.

So we're left with two supposed "problems". First, that Airbnbs are taking housing stock off the market making housing more unaffordable. And second, that Airbnb guests are somewhat more unpleasant to live next to than regular residents. Fortunately, neither hypothesised problem survives contact with reality.

First, Airbnb hardly makes up enough of the London housing stock to have a noticeable impact. As the article points out "all the listings on the site account for less than 0.7% of the housing stock in greater London." Of course, for this to reduce the supply of "affordable" housing it would require that in the absence of Airbnb, that most hosts would instead put their place out on the market as long-term lets, something that's far from guaranteed.

Of course, high rents aren't caused by a small fraction of homeowners renting their properties out. Rather they're caused by a planning policy that prioritises protecting intensive farmland  over homes for the rest of us. Research from Christian Hilber at the LSE suggests that if the most regulated region in the UK (South-East) was deregulated to level of the least regulated region (North-East) then house prices would 25% lower. 

Jim Pagels in a witty Medium post, points out the intellectual bankruptcy of blaming Airbnb for high housing costs.

Here’s a thought exercise: Imagine the U.S. had very restrictive laws regarding smartphone production. If a new Apple factory wanted to produce more iPhones, each phone would have to go through a long, onerous, and costly approval process by the local government and regulatory agencies. In addition, nearby established phone factories or incumbent phone owners in many areas could successfully pressure the local government to prohibit the new factory from producing phones. Because of these burdens, the supply of phones rises only very slowly (far less than the growth in phone demand), and many people have to go about sharing a phone with family or friends or diverting huge portions of their monthly budget to owning/renting a scarce phone.
In this alternative phone regulation reality, the criticism that “some tiny portion of phones are used for leisure like social media and games rather than important things like work or talking to your family!” as a major cause the phone shortage and high prices would seem obviously wrongheaded.


The Sunday Times' other objection is that Airbnbs (as opposed to long-term lets) impose additional costs (noise mainly) on nearby residents. This is what we economists call a negative externality. An extra cost borne by a third party that's not priced in to the trade taking place. But it's not clear that one exists here.

The excellent Michael Lewyn at the excellent Market Urbanism blog looks at the data and finds this argument wanting. One way to test whether something causes a negative externality are its effects on nearby property prices. For example, if a coal plant opened next-door to an apartment block, flats in that block would probably sharply fall in value. He tests the claim that commercial uses (as opposed residential uses) lower nearby property values by using a proxy for mixed-use areas (Walkscore) and found that high Walkscores correlated with high property values. If Airbnbs imposed costs on others then you'd expect areas with bars, restaurants and hotels in walking distance to have lower property values.*

The Sunday Times should switch targets. Instead of Airbnb they should shift their focus to the outdated planning laws that mean so many spend 50% of their income on rent.

*On Twitter, The Guardian's Alex Hern objects to this line of reasoning. Pointing out that hotels might better contain negative externalities than Airbnbs. Perhaps, he's right that not all commercial uses are equal.

Thankfully, for the sake of my argument, Michael Lewyn has a second test of whether Airbnbs impose costs. He finds that areas with a higher number of Airbnbs experience faster price growth than the citywide (LA in this case) average.

Obviously, it's going to be hard to untangle cause and effect here. So perhaps a better solution is for local authorities to better police noise complaints. Adequate punishments for excessive noise should deter hosts from taking noisy guests in.


Sorry Mr. Gummer but this is what it is all about

It appears that not all have got the message about Brexit. It's not just that we're leaving the European Union, it's that it is now possible to reject an entire style and philosophy of government. On opportunity that we should grasp with both hands, of course.

This specific set of regulations is neither here nor there really:

It was one of the stranger battlegrounds of the Brexit debate: thecontroversy over the EU’s plans to save energy by banning high-powered toasters and kettles.

But now the Committee on Climate Change has poured cold water on Brexiteers’ hopes that leaving the EU would see Britain carry on using power-guzzling appliances with abandon.

In a report on the implications of Brexit, the Government’s official climate advisers warned that retaining weaker energy efficiency standards for consumer goods in the UK would jeopardise emissions-reduction plans and be bad for consumers and manufacturers alike.

That committee being where John Gummer retired into his obscurity of course. Whether a few bansturbators manage to pleasure themselves by banning high power kettles or not is very little to do with the fate of the nation. But it is a sign,  a signal, of a style of government.

That style being one where we, the people, are to be managed as our betters in the bureaucracy insist we should be. A world in which we are not adults who can make up our own minds, manage decisions for and by ourselves, but one in which we not only have to be told what to do we must be forced to do so.

Lord Deben, the chairman of the CCC and a strong supporter of remaining in the EU, suggested that even if the UK ditched EU efficiency standards, consumers might find themselves with no option but to buy more efficient products anyway, since international manufacturers might not make separate high-powered products for the UK market. 

Excellent so we don't need the regulations anyway, do we?

We have actually already been told that these sorts of regulations are not the way to deal with climate change. The Stern Review actually told us this. Don't try to micromanage and regulate - change just the one thing, the price of carbon with a carbon tax and let the market do the rest. So even in terms of climate change this is the wrong thing to do.

But it's the wrong thing in terms of governance too. A nation of adults can decide for itself whether they want quick coffee or slow tea. Brexit gives us the opportunity to return to being such a society - we should take it.


Neoliberalism is a force for good, says Madsen Pirie in today's Telegraph

Neoliberalism is a force for good in the world, President of the Adam Smith Institute Madsen Pirie argued in the Telegraph this morning. His article noted:

Although the term "neoliberal" is meant as an insult, it need not be. It stands in contrast to the Marxist position of Labour, and the illiberal, protectionist and sometimes xenophobic attitude set against it. Neoliberalism is a viable third alternative.
Neoliberals regard most people as best equipped to make their own decisions about life, and should not be subject to the arbitrary will of other people. They see markets as the most efficient and humane way to allocate resources and to let people determine their priorities. They welcome the fact that the global spread of market economies has lifted billions out of poverty and deprivation and has improved living standards as never before in human history.
Sometimes names become bywords for unpleasantness – it happened to Boycott and Quisling, and might yet happen to Corbyn. But sometimes insults become commonplace descriptions. "Tory" once referred to Irish bandits, but the party now embraces the name, and the same could work for neoliberalism. The Adam Smith Institute has just taken the first step by calling itself a neoliberal, free-market think-tank.

British childcare isn't working

Rather disturbing numbers from the OECD here:

Childcare costs in Britain are by far the highest in the Western world, an international study has found.

Couples spend more than a third of their income on nurseries and childminders in the UK – more than three times the cost in France and Germany.

A full-time nursery place for a child under two costs £222 a week, up by a third in six years. It means working mothers now have to spend £11,300 a year on average on childcare, and up to £15,700 in London.

Leave aside the sounds of various axes being ground and consider the detail of the OECD numbers. These are a little old but will still be about right.

The UK is just behind the Nordics on the public spending on childcare. There's nothing either right or wrong about that - it's a policy choice. Should child care be largely privately funded or publicly? 

For example, we hear often enough that British rail fares are the most expensive in Europe, the world, the universe, whatever. And the reason is that taxpayer support for fares is lowest here. It's simply a policy choice.

But here comes the problem. British child care is also very high on the list for private costs. The Nordics, with their high public payments, are all at the very low end for private costs. Those places which are alongside us in having high private costs have low public costs.

We have, somehow, managed to create a system which has both high private costs and also high public costs. Which is absurd of course. It means that we've simply got the whole system wrong.

Ourselves we think this goes back to the Blair/Brown days when ever more regulation about who can provide childcare and how was loaded onto the system. But we're willing to listen to other explanations - for a system which manages to be expensive both ways is obviously one we want and need to change.


Coming out as neoliberals

You may have spotted that we’ve recently decided to start calling ourselves free market ‘neoliberals’, instead of libertarians. Nothing has changed about what we believe about the world, or the approach we take to making it better. But after thinking about it and discussing it among ourselves we decided that this was a clearer label for what we already believe and do.

Madsen's "Looking at the world through neo-liberal eyes" is an excellent primer on what we mean by this. I've had a stab at something similar, too. For us, the word neoliberal means that we’re:

  1. Pro-markets
  2. Pro-property rights
  3. Pro-growth
  4. Individualistic
  5. Empirical and open-minded
  6. Globalist in outlook
  7. Optimistic about the future
  8. Focused on changing the world for the better

These are, of course, what we’ve always been. We promote low, simple taxes because we want economic growth and to give people more power over their money, so it is individuals and not the state that choose where their income goes. We promote competition in healthcare, education, utilities and other public services because we want those things to be better through a process of experimentation and individual choice. We promote globalisation and a liberal immigration system because we want to raise the living standards of people around the world through trade and investment. 

Adopting the word ‘neoliberal’, then, is not a change of policy but a recognition that other labels do not describe what we’ve always been quite as well. We're not closing the door on libertarians, Objectivists, anarcho-capitalists, Whigs, free marketeers, conservatives, voluntarists, agorists or liberals - these are our friends and allies, and we welcome all to speak at our events, but these are not the words that most accurately describe us.

Why not ‘libertarian’, which we've used before? In the UK the word libertarian has a rather rigid meaning - someone who is opposed to all but the tiniest night watchman state in every case. In the US this isn’t the case. There, the word is more of an umbrella term for small state liberals who nonetheless might favour things like school vouchers or a Negative Income Tax as an end goal for policy, not just a stepping-stone to eventually abolishing all government altogether. But in the UK, I think it's confusing to many people to describe anything short of almost total abolition of the state as 'libertarian'.

Rightly or wrongly, many people in the UK are confused or annoyed when self-described libertarians such as us favour some measure of government, built on market-based lines. But we don’t care about ideological purity, we care about making the world better using experimentation and evidence. ‘Neoliberal’, like classical liberal but unlike libertarian, implies that we’re not all-or-nothing absolutists.

So why not ‘classical liberal’? We think that the world is better now than it ever has been, and that markets and property rights are to thank for that. The ‘Washington Consensus’ policies that advise developing world governments to get their spending and taxes under control and focus on opening markets up to competition and investment are in large part to thank for this. The massive reductions in poverty across the developing world and rise in wealth in places like China and India are thanks to the neoliberal order of sound government and free trade, and we want to defend that.

The classical liberal heroes we admire - Adam Smith, of course, but also people like John Stuart Mill and David Hume - are the progenitors of this order, but our policy programme is updated for the modern world. You might say that neoliberals are classical liberals with smartphones, internet access and frequent flier miles.

And then, of course, is the fact that ‘neoliberal’ is already in use today, but almost exclusively as a slur. For a large number of people (mostly on the left), neoliberalism describes the modern world order and the fact that nobody self-describes as a neoliberal is proof that nobody is willing to defend that order. Well, not any more. 

The words Tory, suffragette and Whig all began as insults but were adopted and reappropriated by the people they were used against. We intend to do the same with neoliberalism. The modern world is where it is thanks to markets and property rights, and we’re thankful for that. But with sensible policies it could be even better. And that’s where we neoliberals come in.

We really don't think this is a good idea

It's obviously wildly desirable that Members of Parliament get a good kicking. Not for any particular reason, just on general principles. However, this particular suggestion being made is not a good one in our view.

The idea is that they're all waltzing off and earning cash doing something else other than serving their constituents. Thus some limitations should be placed on the cash earning to ensure the serving. Superficially attractive but we're agin it:

MPs will be forced to drop lucrative outside jobs if they "conflict" with their jobs serving their constituents, according to a proposed new code of conduct.

The MPs' second jobs will be scrutinised by the Parliamentary standards watchdog for the first time in a major crackdown on politicians’ lucrative work away from the House of Commons.

A new code of conduct will require MPs to ensure that any outside work “does not conflict” with their day jobs representing constituents in Parliament.

The change in the rules – which are still to be approved by MPs– will radically cut back the amount of time MPs will be allowed to spend away from their constituents.

It could also make it easier for the Standards Commissioner Kathryn Hudson to stop MPs using their positions to win paid consultancy work outside the House of Commons.

It's not that we're against the idea of some method of stopping MPs from troughing it. It's that we're massively against anyone having the power to tell MPs what they may or may not do.

Having control over the secondary finances of MPs means having control over MPs. We simply don't think that anyone should have such control.

Share buybacks are a good thing

A wide range of commentators, experts, and laymen have recently denounced share buybacks: where firms buy their own equity on the stock market, effectively deleting shares and raising the size of those that remain. These critics claim that share buybacks are a symptom of corporate short-termism: these firms, instead of investing in factories, skilled labour, information, research, premises and so on to raise their long term success, are merely boosting short-term returns. Thus, it is said, the managers of these firms are actually contributing to "secular stagnation"—slow growth around the world, not due to the business cycle—and the "productivity puzzle"—the surprisingly slow improvement in British and European output per worker and per hour.

But this is all wrong, and these critics are fundamentally mistaken. Buybacks improve stock market efficiency by pricing in inside information without harming outsiders, when firms know things their shareholders don't. They also free up funds to be invested in other firms: if firms repurchase shares they are effectively saying: at the current price it would be better to put our cash into other projects (perhaps in other firms); we have already funded all the investments with a cost:benefit ratio that passes muster at the current interest rate.

Start with a simple model of investment. You try and hold a portfolio of securities—bank deposits, bonds/gilts, and equities—based on how much risk you are willing to hold, and what your opinions are on the prospects of various firms, sectors, and countries, relative to the market. If you think Apple stock is worth more than the market price you hold more of it than the average investor; if you think China will grow faster than the average investor, you hold more Chinese assets; if you're investing for retirement in 50 years you hold more equities; if you're investing for a few years in the future you hold more bank deposits and gilts.

When a firm decides to buy its stock back, it will have to bid marginally above the market price to induce stockholders to sell, as well as accounting the mechanical price increase due to concentrating remaining holdings. Those stockholders who value the firm at exactly its current share price will sell first, and then those who value it marginally above the current price, and so on. But there is no reason to expect that the overall appetite for saving and investment has decreased: we should expect these investors to redirect this cash into whatever marginal investment they almost did instead of the firm in question. When Apple was £12/share they may have fancied it, but when it's £15/share Google might be more attractive.

Thus, overall investment is not affected by buybacks. It is merely redirected to better uses. The counterfactual is either overinvestment in upopular sectors and obsolete technologies, or conglomerate-isation. Should the rise of digital cameras prompt Kodak to (a) start up a digital camera division; (b) invest more in its existing business; (c) or focus on its profitable activities and let its investors go for Canon and Nikon. There is a case for (a), but history suggests (c) was the best strategy—companies suffer diseconomies of scope.

A new paper by Pascal Busch and Stefan Obernberger in the Review of Financial Studies (abstract, ungated earlier version) confirms the predictions of the simple intuitive model. They study data on US stock prices and find that repurchases enhance several measures of price efficiency, primarily by intervening when outsiders underrate firms' prospects in ways that insiders are sure are false. What's more, they can't find evidence that managers use buybacks to manipulate their own pay packets.

The message is clear: financial markets work well, and meddling with them can be costly!

No, don't let MPs have a vote on Brexit

An interesting little political manouevre here, insisting that MPs should be able to vote on the trade arrangements post Brexit. Specifically, the claim is that membership or not of the Single Market is not the same as Brexit and thus MPs should vote on that single market membership or not.

To which the correct answer is no, go away:

Theresa May is under massive cross-party pressure to grant MPs a vote on any decision to leave or limit UK involvement in the European single market, amid growing outrage at the prospect that parliament could be bypassed over the biggest economic decision in decades.

Tory MPs joined forces with former leaders of Labour and the Liberal Democrats, the SNP and Greens to insist that parliament have a say and a vote, pointing out that, while the British people had backed leaving the EU, they had not chosen to leave the biggest trading market in the western world.

They're right it's a large decision and one can indeed make a case that that's what they're for, making decisions for us. But in this case the answer really is no, go away.

Because it's being made very clear to us that the Single Market is Brexit. We are being told that if we want membership of that trading area then we've got to accept free movement of people (not in itself a bad idea but not really what people voted for), all of the regulation of the economy which the EU imposes, must pay into the EU budget and so on and on. Essentially, it is being made very clear that membership of the Single Market comes with all of the costs and responsibilities of full EU membership.

That is, single market membership is a denial of Brexit itself.

We do all know that a majority of MPs are against the very idea of leaving. Which is exactly why they shouldn't have a vote on the matter. For accepting single market membership is tantamount to not leaving, it would be a reversal of the referendum by the back door.

Doesn't market competition just cure so many different things?

That Brexit is just going to cause food prices to soar of course. For Britain imports 40% of its food, the pound has tumbled and we're all doomed:

Prices in British shops dropped by another 1.8pc in the 12 months to September, as fierce competition between supermarkets outweighed the impact of the fall in the pound to drag down groceries prices, according to the British Retail Consortium (BRC).

Food price deflation accelerated with prices down 1.3pc on the year, a faster fall than the 1.1pc dip recorded in August.

“We are now in the fourth year of falling shop prices, so the record-setting run of shop price deflation continues, which is great news for consumers,” said the BRC’s chief executive Helen Dickinson.

It is indeed great news for consumers which makes this headline a little off:

UK food prices suffer biggest ever drop in September
Food prices fall 1.3% year-on-year despite a recent uptick in global commodity prices.

Suffer? Who? The cause of all of this is:

In a startling development, almost unheard of outside a recession, food prices have fallen for nine straight months in the U.S. It’s the longest streak of food deflation since 1960 -- with the exception of 2009, when the financial crisis was winding down. Analysts credit low oil and grain prices, as well as cutthroat competition from discounters. Consumers are winning out; grocery chains, not so much. Their margins and, in some cases, their stock prices, are taking a hit.

Yes, in both the US and the UK the fall in food prices is being driven by that market competition. Or as we can also put it, that lust for pilf and gelt of the few German billionaire families that own and run Aldi and Lidl. 

All of which tells us what one of the major jobs of government is. That major job being to allow that lust for gilt and pelf to run rampant throughout the economy - but with care. We must not let market incumbents prevent market entry in order to protect their gains. But we must allow market entry for the entrants to pursue their own dreams of mountains of cash. Precisely and exactly because it is the competition in search of those piles of wonga that so enriches consumers.

We do not want government to prevent, limit or even manage competition - we just want them to make sure there is room for it to happen. Once that is true we can leave human greed to deal with the rest of it.