Wages aren't even growing, let alone at a record rate

The standards of modern journalism:

Wages in the United Kingdom grew 7.8% in the three months to June, the fastest annual rate since records began, the Office for National Statistics said Tuesday.

“Coupled with lower inflation, this means the position on people’s real pay is recovering,” said ONS director of economic statistics Darren Morgan.

UK consumer prices rose 7.9% in June compared with June 2022.

Sigh. If wages are rising slower than inflation then real wages are falling, not growing at all. Given that we have had real wage rises within living memory this also isn’t the fastest wages have grown since records began, either.

As to why wages aren’t growing as we’d hope and expect them to this is not, sadly, some aberration of macroeconomics and the fiscal stance. Instead it’s because the country is beclowned with people insisting that they’re creating jobs. With solar and boilers and wind mills and low traffic zones and ULEZs and all the rest.

All of these things - and many more - could be good things to do. We don’t think so but that’s us not some insistence of the universe. What is absolutely true though is that the benefits of these things, even by the definitions of those promoting them, are not in hard cash numbers. They’re in things we do not include in GDP, they’re about externalities to market prices and processes.

OK, but that means that the benefits of them do not arrive in wages, one of those hard cash numbers which are market prices. We’re deliberately spending our wealth and effort on things which even if they have benefits do not, by definition, benefit real wages. Because, by definition again, those externalities are not things that we spend our wages upon. Then people wonder why wages aren’t rising.

It’s not just journalism that gets wages wrong. Sadly, it’s the entire body politic. Everyone shouting that solar provides more jobs than nuclear - something which is both true and which many people do say - and therefore we must have more solar is pushing down labour productivity and thus all the wages in the entire country. That’s just the way reality works.

Not that Argentine politics is really for us to comment upon

There are all sorts of things it is possible to say about Argentina and its politics. Most of which we’ll not say because far too many of them descend into a jingoistic - but most enjoyable - prodding of the anthill. You know, this is what a century of corporatist politics looks like and all that. There is one thing though. On this laddie who has just won a plurality of the votes in the primary elections:

Far-right candidate who wants to legalize organ selling wins Argentina's presidential primary

So far we’ve not investigated and we’ve no idea whether the gentleman, Sr Milei, is far right, right or even centrist. But organ selling?

The only place we know of that actively encourages “organ selling” in this sense is Iran. Which does not allow organ selling of course. It is not possible to turn up at a hospital with a bleeding heart, or half a liver, or a kidney, and bargain over the price to be paid.

What is possible is that those who are willing to provide one of their two kidneys to someone who will die without one - Iran has a shortage of dialysis machines, even they don’t work forever even if they had a sufficiency - can be compensated. There is a state fund which does such compensating - of the order of a year or two’s median income plus free healthcare for life - and it is also possible for larger, private, arrangements to be made.

Many other places in the world allow live kidney donation. On the grounds that there simply never are enough usable cadaver ones to solve the problem of people dying of kidney failure. But those donors must be donors, not compensated providers.

Iran is the one place in the world where people do not die while waiting for a kidney. Everywhere else some do, each and every year. This is not a coincidence, it is not mere correlation. People who elsewhere would die gain a continuation of life simply because the Iranian Mullahs are not precious about incentives. They may be all sorts of things (one of us has had significant links with the place) on other subjects but upon this one they’re being wholly pragmatic. If offering healthy folk who will remain healthy some cash to save the lives of others saves those other lives then why not?

Incentives matter, after all.

We don’t see compensated organ provision - assuming a controlled market, not that turning up with a fresh piece of offal and asking for bids - as being far right in the least. Simply a sensible policy that saves lives.

A rational drugs policy

Many people take drugs because they like the feeling they experience by doing so. This is a more extreme version of why some people smoke cigarettes or drink alcohol. Most do so because they like it and most don’t become addicts.

Because most drugs are illegal, they are traded on the black market, setting their users and suppliers at odds with the law. Because they are illicit and underground, there is little to no quality control, leading to deaths from adulterated or over-strength supplies.

Their illegality makes them expensive as suppliers risk prosecution and punishment, as well as considerable price gouging. The profits to be had from their sale leads to violent turf wars, as gangs fight for control of the trade. It echoes what happened in the United States during the prohibition era. People in the UK, especially young people, are killed in the street by members of rival gangs fighting for control of a very lucrative business.

Several US states and Canada have joined the growing list of countries that have legalized the recreational use of cannabis. If the UK were to do the same, it would lead to better quality control and enable age checks to be made as the illegal market would dry up if the legal market were allowed to prosper through light regulations and licensing. It would free up much of the logjam on courts and prisons, and end the conflict between recreational users and the police. The Treasury, rather than the criminals, would gain revenue.

The legalization of cannabis would take one widely used recreational drug off the black market. The same could be done with cocaine (8.7% of the population) and MDMA (Ecstasy), (1.9% of the population) both in quite widespread use. Their legalization would free up large numbers of police to deal with more serious crimes in which other people are victims.

Heroin was once available on prescription to registered addicts to consume at home, and it was seen as a problem that it could circulate to others. This could be resolved by setting up clinics manned by medical personnel, in which hard drugs such as heroin could be obtained for consumption on the premises, after medical inspection and advice. This would treat addiction as a medical, rather than a criminal, problem, and address it by medical personnel instead of with law enforcement officers. It would bring quality control and safety to the fore, and remove the current illicit drugs trade that underlies so much crime.

It could be argued that legalization would lead to increased use, just as the ending of prohibition led to increased alcohol consumption. US voters went for repeal because the alternative was Al Capone and his ilk. The UK is in an Al Capone situation with illegal drugs, and could similarly end it by repealing the prohibition of them.

The IFS proves that Scott Sumner is, in fact, correct

One of Scott Sumner’s assertions is that government doesn’t really have control over the overall expansionary or contractionary stance of economic policy. This is, at the very least, shared with the independent central bank. Or, in Sumner’s insistence, it entirely offset by the decisions of that central bank.

One proof of this might be the Truss/Kwarteng adventure where the low tax dash for growth was indeed derailed by the Bank of England (well, according to some tellings of that story at least).

Another and more detailed proof could be this from Paul Johnson at the IFS:

Tax cuts would put ‘scary’ UK finances in greater danger, warns top economist

That’s not quite what is said, that’s the headline writers. Rather:

Rishi Sunak and his chancellor Jeremy Hunt remain under intense pressure from their own MPs to cut taxes in March, in the run-up to the next election. While the prime minister has been clear that cutting inflation is his only economic priority for now, officials have privately hinted he is interested in making a cut, such as reducing income tax by up to 2p.

However, Johnson said such a cut would be a “political and not an economic decision” that came with risks. “Two pence off income tax is quite a big change,” he said. “That’s something like £15bn. The big question for the chancellor then would be, how’s the Bank of England going to respond?

“The nightmare scenario will be a nasty market reaction, a la Truss. But an almost equal nightmare reaction would be the Bank saying, ‘We were effectively saying that we were keeping interest rates steady, but now you’ve just injected an extra £15bn into the economy. We’re still worried about inflation and we’re going to put them up’. That should weigh very heavily in any decision on tax cuts.

“A £15bn cut in tax this side of March - without concrete tax rises or spending cuts proposed to offset it - it would be a political and not an economic decision.”

Something being a political, not economic, decision should not be a total disproof of the decision itself. We do have elections so that we can choose between different political visions after all.

However, that more technical point there. If the current government cuts taxes by £15 billion, without also cutting spending to match, then the expansionary effect will - likely enough - be offset by the Bank of England changing interest rates.

The expansionary - or contractionary - stance of fiscal policy is offset by the equal and opposite effects of monetary policy. Therefore the overall stance is not something in the power of the government. That is the Sumner point. It’s something that is so embedded in serious thinking on the subject that here we’ve the IFS warning about it.

What this means is that if the current government wants to cut taxes by £15 billion then they should also cut spending by £15 billion. A thoroughly good idea of course. Indeed, give us a free hand and we’ll find £150 billion in spending to cut. Certainly £100 billion because O’Rourke’s Principle of Circumcision is correct - you can take 10% off the top of absolutely anything.

But the Sumner point stands - government is not in control of the stance of policy because the fiscal stance is and will be offset by the monetary stance. Which is fine of course. This leaves government in charge of fiscal policy. How much is to be taken off the populace to be spent upon what?

Less, obviously.

This is how markets work, yes

Savers pull £80bn out of Britain’s four biggest banks in protest of dismal rates

Savers are either switching to rival savings providers or paying off rising mortgage bills

We’d not say in protest ourselves. Rather, someone’s offering them a better deal elsewhere. Either a better interest rate on their savings or perhaps zeroing out some of their debt is that better offer.

But this is how markets work. No one at all looks at the price they’re paying for supplies - which is what our deposits into a bank are to a bank - and works out what is fair. They pay the least they think they can get away with. The thing which limits that minimal getting away with it price is what other people are willing to pay for that same thing.

This is true of everything in a market. Wages are not - contrary to belief - determined by what your employer thinks is fair to pay you. Rather, by what the next, alternative, employer is willing to pay you. Your actual employer must at least match that number (plus conditions) to retain your efforts. And so too of steel - the steel price is not set by what Ford is willing to pay, the price to Ford is set by what Stellantis, Aston and GM are willing to offer.

The interest rate offered on your savings is not determined by Lloyds deciding what is fair. But how much Lloyds has to pay to get you to deposit there. Something determined by the interest available on other deposit accounts and, even, the negative return you’re getting on your borrowings.

Banks must have deposits of course - no, MMT is wrong on this. Look at the bank’s financial accounts sometime. Deposits plus capital always equals loans out. Banks must balance their books in this manner each and every day (at 4.30 pm in fact). Thus, if Lloyds (to continue with the one named example) suffers an outflow of deposits it must find some from somewhere else. By, say, changing the price it is willing to offer for them - the interest rate.

It is true that banks have not increased the interest they pay on deposits as fast as they’ve been raising what they charge for loans. Fortunately we also have a system to deal with this - the market. Leave it be and she’ll be fine.

The Emis Group proof of why UK GDP growth is slow

Now, whether Emis Group should be taken over by United Health isn’t an interesting point for us. We’re not sure what they actually do, either of them and care rather less. For our example here is not about the specific companies it’s about why economic growth in Britain is so damn slow. We’re even willing to run with the idea that the proposed takeover here should be denied - it isn’t being - and yet our criticism and explanation would still stand.

Here’s the story from the Stock Exchange announcement:

On 17 June 2022, the Boards of Bordeaux UK Holdings II Limited ("Bidco"), an affiliate of Optum Health Solutions (UK) Limited ("Optum UK") and a wholly-owned subsidiary of UnitedHealth Group Incorporated and EMIS Group plc ("EMIS") announced that they had reached agreement on the terms of a recommended all cash offer pursuant to which Bidco would acquire the entire issued and to be issued ordinary share capital of EMIS (the "Acquisition"). The Acquisition is being implemented by means of a Court-sanctioned scheme of arrangement under Part 26 of the Companies Act 2006 (the "Scheme").

On 9 August 2022, EMIS announced that at the Court Meeting to consider the Scheme and the General Meeting to consider the Special Resolution relating to the Acquisition, all resolutions were approved by the requisite majorities. EMIS further announced that a notification had been made and accepted under the NS&I Act and that the Secretary of State had confirmed that no further action will be taken in relation to the Acquisition.

On 31 March 2023, the United Kingdom's Competition and Markets Authority (the "CMA") announced that it had referred the Acquisition for a Phase 2 investigation. On 6 April 2023, EMIS and Bidco announced that they would be proceeding with the Phase 2 CMA investigation and would engage constructively and collaboratively with the CMA throughout the process.

The CMA has today published a summary of its provisional findings from its Phase 2 investigation into the Merger (the "Provisional Findings").

Bidco and EMIS are pleased to announce that the CMA has provisionally cleared the Acquisition. The CMA will now publicly consult on the Provisional Findings before reaching a final decision by 5 October 2023.

As we say, whether the bid should go through or not is not our point. That this started in June 2022 and won’t even get to the beginning of the end until Oct 2023 is.

The economy is the aggregate of our collective and individual actions. GDP is the measure of those actions but restricted to those monetised and measure at market prices. Changes in GDP are - therefore and obviously - changes in the amount we do and the things we do. The speed of GDP changes - the rate of economic growth - will be determined by both how quickly we work out how to do new things, plus old things in a new way and also the speed at which we are allowed to do new things and things differently.

If we’ve a bureaucracy placing a 16 month delay upon doing things differently then economic growth will be slower than in the absence of such a bureaucracy.

Therefore speed GDP growth by abolishing the Competition and Markets Authority.

It’s even possible that every decision made by the CMA is perfectly, rigorously and justifiably correct. But either they need to make decisions promptly - say, 5 working days - or they need to go. For we hold it to be self-evident that more wrong decisions would be better for economic growth than a 16 month delay on anyone doing anything at all.

A new approach to overseas development

The United Nations has a target for developed countries to spend 0.7% of their Gross National Income (GNI) on Official Development Assistance (ODA). The UK had previously set this target, then reduced it to 0.5%, but now targets returning to 0.7% in 2024-2025.

Some commentators criticize the UK, and indeed the USA, for contributing too little to the development of poorer countries, but the amount the two countries give is much higher than the figures show. The statistics only show what governments contribute (£15.2bn), but data from the World Bank shows that £23.6bn is paid in remittances from the UK, with £10.6bn in charitable donations. People who came here as immigrants send money to their families back home, and thereby make a significant impact on their domestic economy. The same is true in the United States.

Furthermore, this direct person to person aid does more economic good than government to government aid. As Professor Peter Bauer pointed out, government aid signals to ambitious people in poor countries that they must turn to the government to improve their lot. People who might otherwise go into business or start businesses themselves, turn instead to seek contracts from government or positions within government. There are also fewer opportunities for corruption and waste in person to person transfers of wealth, although some smaller fraud has occurred. The money goes straight into the local economy and helps to fund things such as education, as well as raising living standards.

There is something else that works. It is the low tax, light regulation model that boosted Hong Kong from abject poverty into first world affluence. It did the same in Singapore, in Taiwan, and in South Korea. It was behind the West German “Economic Miracle” of Ludwig Erhard, and of Japan’s rapid post-war recovery.

The UK should boost development in poorer countries by the two things that we have ascertained work in practice. It should encourage person to person aid transfers from UK people to their relatives in poorer countries. This could be done by giving such contributions the same kind of tax relief that goes to those who make donations to registered charities through Gift Aid. An allowance would be set at such a level as to avoid this generous tax relief being used for tax avoidance or overly advantaging those whose families live abroad.

The UK could also collaborate with poorer countries to have an area, preferably including a port, assigned on a lease of perhaps 30 or 50 years to a consortium, solely at the invitation of the host. It would be a freeport and much more. The governing consortium would set the levels of taxation, and run the area’s policing and judicial administration. They would determine its property laws and its regulatory structure. The aim would be to recreate what Hong Kong and the others did. With the right conditions, property rights and rule of law, international investment would pour in, creating both businesses and jobs locally. Local people would rush to work or live there because of the opportunities.

There is little doubt that untrammelled enterprise would achieve far more than development aid has managed to attain after decades of effort. Combined with incentives to augment person to person transfers, this could set poorer countries on that upward path to affluence and increased prosperity.

The idea's right here, a tax on private jet fuel. It's the details that are awry

This is not a bad idea, despite being about climate change and also in The Guardian:

Our legislation would increase fuel taxes for private jet travel from the current $0.22 to nearly $2 a gallon – the equivalent of an estimated $200 a metric ton of a private jet’s CO2 emissions – and remove existing fuel tax exemptions for private flight activities that worsen the climate crisis, like oil or gas exploration.

We advocate the carbon tax so we should, must and do welcome proposals to impose the carbon tax.

There are a few problems here. If emissions from flying are a bad idea then emissions from flying are a bad idea. There’s no reason why only private jets should pay such taxes - government ones should as well. So too should commercial ones. That goose and gander thing really does apply to Pigou Taxes upon externalities.

Of course, the rate is wrong, should be more like 80 cents so as to reach the $80 social cost of carbon. There’s the usual American political foolishness about hypothecation of tax revenues. Instead of allocating that revenue to some specific subject better to simply put it into the general fund. There’s absolutely nothing at all about climate change that says government should get bigger. Only that the revenue for government should perhaps come from different places.

We spend enough time around here berating people for proposing very silly things to do about climate change. Here we’ve at least the beginnings of a sensible suggestion. Yes, the solution to aviation is the carbon tax. Because people should pay the full price of their actions and that should be visible in prices. Once those costs are included then of course we are finished with the subject. The only flying that will take place is that which is producing more value than the damages caused. That is, the only aviation left after a carbon tax will be that which increases human utility.

Which is, after all, the point of the game itself - civilisation’s aim is to maximise human utility.

Contestable monopolies, if exploited, will be contested

The latest of the Yellow Perils is that China is restricting the export of gallium and germanium.

The Chinese today produce 98pc of the world supply of primary gallium. The figure falls to 80pc for purified gallium used in industry, but you cannot reach that stage without access to the raw material. This is the metal that China has chosen to target along with its sister germanium, 31 and 32 respectively on Mendeleev’s periodic table. It won’t be the last.

Many are getting very worried over this. No one should be very worried over this.

One set of reasons is technical. The raw materials to produce the two are, respectively, Bayer Process residues and fly ash from coal burning. Here’s a list of those plants that extract alumina from bauxite, that Bayer process. Stick the right doohickey on the side of any of those plants - very few currently have one - and get gallium. Very, very few think that there’s a shortage of fly ash in the world. Both can also be extracted as byproducts from certain zinc ores.

There is simply no shortage at all of the base materials. All that’s ever needed is the willingness to actually process them out of extant resources. So, not a large problem then. China’s the major supplier because it’s willing to do it cheaper than others and when that’s not true then China won’t be the major supplier.

We can prove this from experience. Back in 2010 China tried something similar with the rare earths. As one of us predicted - to predict these things, in print, is more impressive we feel than simply historical pointing - that this would not be a problem. Four years later it was agreed that we had made the right prediction.

It’s also possible to appeal to another set of reasoning, away from the technical details of these markets. Which is that if anyone tries to exploit a contestable monopoly then the monopoly will be contested. The only way you can keep a monopoly position that could be contested is by not exploiting it for reasons of profit or power. That is, if you have a monopoly over the production of something just because you do it well, or cheaply, or subsidise it, then the moment you raise your price to profit from your control then everyone else is going to roll up sleeves and go back to doing it themselves. Slightly more expensively than when you were doing it, true, but less expensively than your attempt to exploit.

Which is indeed what happened with rare earths. And will also happen with gallium and germanium. And, as we insist, every other contestable monopoly. It’s the very attempt to capitalise upon that monopoly position that motivates everyone to break it. And precisely because it is contestable the contestation will work.

It is true that Gerry Wise is no longer with us to guide the germanium factory (Gerry being perhaps the tail end of that Finchley area metals industry described by Oliver Sachs in “Uncle Tungsten”) but as it happens one of us has the plans for a germanium extraction plant on a desk somewhere - fly ash from a lignite plant to produce perhaps 4 tonnes a year (say, 2% of global demand. About). If anyone’s unconvinced by the explanation above about why not to worry they can just send a blank - but signed please - cheque and we’ll get on with it.

Or perhaps more sensibly, leave those who know what they’re doing to contest that monopoly that China is trying to exploit. As we insist, it will be successfully contested.

The NHS guarantee card

The announcement that private facilities are to be used to provide some healthcare services without charge to NHS patients is an important step on the road to improving the NHS. More such steps should be taken

All UK citizens should be given an NHS Guarantee card, like a credit card, that guarantees them free treatment. Their Health Guarantee card must give whoever treats them full access to their health records, previous treatments, together with any previous or current conditions. It must cover the cost of their treatment, funded by the state.

In the event of any delay in access to treatment in the public health sector, the card should be valid for private sector treatment, with a cap on costs similar to those widely used in automotive and housing insurance. Such caps should be subject to periodic review by the Department for Health and Social Care.

With the funding of healthcare covered by social insurance, the delivery of healthcare should be provided by a mix of public and private facilities paid by the state or private insurers on the basis of the treatments they deliver. GPs should be paid according to the number of times they see and treat patients, with in-person consultations paying more than video or telephone meetings. Doctors would be paid for providing healthcare for patients, rather than for having them on their books, which is the current system.

Similarly, hospitals and consultants should receive their funding according to the treatments they provide. The government should make contracts with them to provide healthcare on an agreed basis.

GPs, consultants and hospitals should be given their independence through a wider rollout of NHS Foundation Trusts, rather than being managed by a centralized bureaucracy. They should compete to provide treatments, to attract patients, and might be encouraged to specialize in doing what they do best.

There should be tax deductions for those who use supplementary private insurance to save the state money and resources. This happens in Australia, where most people take out private cover in addition to the state’s Medicare programme that guarantees them treatment. Since the private insurers cannot take into account the current health status of the applicant, the risk is pooled.

UK doctors are leaving in significant numbers to go to Australia, some as soon as they have finished their qualifications. Yes the changes outlined herein could potentially make the UK’s NHS as efficient, as attractive, and as popular as healthcare in Australia is.