The Pin Factory Blog

We're back to Bastiat and what is seen and unseen I'm afraid in this latest research into the effects of the minimum wage. It isn't that a rise in the minimum wage is going to immediately cause the mass unemployment of millions. Rather, that over time the rise in the minimum wage is going to lead to fewer jobs being created:

The findings are unequivocal: higher minimum wages lead to lower rates of job growth. Indeed, a ten percent increase in the minimum wage causes roughly half a percentage point reduction in the rate of job growth, a very large effect. The effect of this hypothetical increase is not permanent, though, since it is eroded by inflation and increases in the state’s comparison group. Our calculations show that this ten percent increase in a state’s real minimum wage, relative to its regional neighbours, causes a 1.2% reduction in total employment relative to what it would have been.

Now of course that's in the US, with their easy ability to relocate either production or labour across state lines.

But there's another point to this as well. If the major effect of a minimum wage is to reduce the creation of entry level jobs then the major group of people who will suffer from a minimum wage are those looking for entry level jobs. The young, the untrained and the unskilled: all of those who are already the poorest in our society. And it's also true that we can track the rising minimum wages, in both the UK and US, against rising teen and youth unemployment: they've been moving in near lockstep.

The takeaway point from that being to wonderwhy on earth there's so much political support for a minimum wage. Why do people support something whose major effect is to screw over their own children when it comes for the time for them to enter the labour market?

Parliament’s cushy consensus over climate change is dead. In 2008, when the Climate Change Bill had its third reading in the Commons, only five MPs voted against. But with doomsday predictions failing to materialize, and the planet failing to warm, MPs are starting to get more skeptical.

On Tuesday, in a Commons Westminster Hall debate, the room was overwhelmingly hostile to the Act. One of those MPs who voted for it, David TC Davies, says that the evidence has made him change his mind:

I am sorry that I was not a member of the famous five who voted against the Act in 2008, but I hope I will now do something to put that right. I must confess that I was one of those who accepted the arguments that were made—I supported the Act when it was passed... I contend that, given what we now know about climate science, we have a strong argument for reconsidering the Act with a view to either revoking it completely or drastically amending it.

While the “famous five” in 2008 were exclusively Conservative, hostility to climate alarmists’ claims now crosses the political divide.  Graham Stringer, a Labour MP, attacked some of the most notable “science” behind climate change legislation. He quoted Lord Oxburgh’s Independent Panel on the Climategate scandal that found that methodology used was “turning centuries of science on its head” and was not replicable. Mr Stringer said that what had happened “was not science but writing narrative”.

Sammy Wilson, a DUP politician, attacked the excessive costs that the Climate Change Act is imposing on consumers and business. “All reason and self-critical analysis go out of the window when people address this subject,” he said.

Peter Lilley called for the Act to be scrapped, to much vocal support:

The Act is not just the most expensive, impractically ambitious and uncertainly based piece of legislation that I have ever known; it is unique in being legally binding and unilateral. No other country has followed us down that route. Since we went down that route, Canada and Japan have resiled from Kyoto, and Australia has just abandoned its carbon tax. It is time we looked critically at the Act, repealed or revised it, and do not allow ourselves to be slavishly, legally bound to continue doing something that no longer accords with the evidence or goes along with what the rest of the world is doing.

But one MP, Alan Whitehead, seemed flabbergasted by the views of his Parliamentary colleagues. “I really do not know where to start…”

“That’s cos you’ve been stuffed!” interjected Tory Philip Davies, to widespread amusement.

An interesting point being made by the economic historian, Brad Delong:

To put it another way: In 1870 the daily wages of an unskilled worker in London would have bought him (not her: women were paid less) about 5,000 calories worth of human, not horse food: not oats (although Scotsmen would disagree) but bread--5,000 wheat calories, about 2½ times what you need to live (if you are willing to have your teeth fall out and your nutritionist glower at you). In 1800 the daily wages would have bought him about 3,500 calories, and in 1600 2,500 calories. Karl Marx in 1850 was dumbfounded at the pace of the economic transition he saw around him. That was the transition that carried wages from 3500 calories per day-equivalent in 1800 to 5000 in 1870. Continue that for another two seventy-year periods, and we would today be at 10,000 calories per unskilled worker in the North Atlantic today per day. Today the daily wages of an unskilled worker in London would buy him or her 2,400,000 wheat human-food--potato--calories. Not 10,000. 2,400,000. That is the most important fact to grasp about the world economy of 1870. The economy then belonged, even for the richest countries, much more to its past of the Middle Ages than to its future of--well, of you reading this.

It's also worth noting that from Angus Maddison's figures GDP per capita in England in 1870 was about $3,200 (yes, of course, in inflation adjusted dollars). The living standard of roughly India or Nicaragua today.

It's a reminder of quite how poor our forefathers were: or how rich we are if you prefer. And also of quite how poor some other places still are. Along with, of course, the point that to get those other places rich, as we all should want to happen, is going to mean those other places following the same sort of economic path as we did. That strange mixture of capitalism and markets that propelled that North Atlantic world into unprecedented prosperity.

Summary: Japanese consumer prices are accelerating

What the chart shows: The chart shows the 12-month per cent change in the headline Japanese consumer price index

Why is the chart important: The Japanese government and the Bank of Japan are currently engaged in a major effort to break Japan’s two-decade long deflationary spiral. They aim to do this through three ‘arrows’ – a fiscal stimulus, a major monetary stimulus and – as yet not clearly spelled out – structural reform. A key goal is to reach 2% inflation by 2015. In the year to July, consumer prices rose by 0.7%. But, more importantly, in July itself, the CPI rose by a seasonally adjusted 0.4%, the highest rate in five years. Even if consumer prices were to remain unchanged from now on (which is highly unlikely), this would still take the twelve-month rate to 1% by early 2014. Prime Minister Abe’s government may not achieve all its targets. But it should successfully get inflation to 2% in 2015, if not before.

As someone who has gone through the nightmare process of registering a company in Portugal this research looks interesting. They're studying the effect of making such corporate registration easier:

Prior to 2005, starting a business in Portugal took 11 procedures, 20 forms and 78 days, and cost around 13.5 % of GDP per capita. In May 2005, however, a new government introduced the ‘On the Spot Firm’ (‘Empresa na Hora’) programme by which entrepreneurs could register a company at a one-stop shop within an hour, receiving the company identification card, the corporate taxpayer number and the social-security number in the same day and at a cost of 3% of GDP per capita.

That's excellent of course, for as they point out, jobs growth, innovation, these are driven by the new entrants into the market rather than by extant firms expanding or innovating. However, they then go on to ask the wrong question (in my ever so humble opinion of course):

The other current widespread policy concern in Europe is inequality, and so it is natural to ask how the easing of entry barriers to boost growth will affect different parts of society. Our research brings these two sets of concerns together, by asking how entry deregulation affects different groups of workers. Focussing on differences in workers’ education and skill levels, we find that on average more educated (skilled) workers certainly gain while less educated (skilled) ones probably lose.

Which isn't what we're interested in knowing of course. What we want to know is what has been the effect on consumers for as Adam Smith pointed out:

"Consumption is the sole end and purpose of all production and the interest of the producer ought to be attended to only so far as it may be necessary for promoting that of the consumer."

It's a rich data set they've got there, the Portuguese government certainly did the right thing. But the effect upon wages simply isn't what we're interested in: how did it help consumers, not producers is.

I've just done a Spectator podcast - online end of the week - on airport competition with Gatwick CEO Stewart Wingate and Margot James, member of the No 10 Parliamentary Advisory board. Let's face it, we need more airport capacity much more than we need a high-speed train that gets you to Manchester half an hour earlier. The Transport Department forecasts that demand will double, from 219m passengers per year, to 480m in 2015. We don't need one new runway, we need a whole slew of them, with extra capacity to encourage real competition.

Boris Island? I love it—big, shiny, high speed connections an all that—but at £96bn-odd and a 30-year planning and construction period, it seems a bit of a non-starter. The Houses of Parliament were built 150 years ago, and came in three times over budget and 27 years late, and that is about the norm for state-run infrastructure projects. So think more £300bn and 90 years. After all, it took nine years just to build a new terminal at Heathrow, not even a new runway.

How I wish that the Thatcher government had listened to us in our paper Airports For Sale back int the early 80s. Then, the state quango, British Airports Authority, ran all six major UK airports, three round London and three in Scotland. But no, they privatized BAA as a unit because it was easier. Since then, all the talk, and action, has been about building up Heathrow as a 'hub'. Typical monopolist talk – we need the biggest, the flagship facility. Nothing about customers being best served by competition. But now, in the last few years, with the (inevitable) forced break-up of BAA plc, we do have competition, and it is wonderful, if you are an air passenger, to see the individual airports vying for your business. Like trying to speed up queues in customs and immigration, and getting rail links to their airports that actually take account of the fact that you might have some luggage. And indeed, competing for the next runway.

Sir Howard Davies, who is reviewing all the options, has so far identified fifty different choices. Let's hope he realises that the most cost-effective solutions are the ones that focus on what customers, not politicians and airport planners, want. Use the market. Only about 7% or UK airline passengers are interlining, so let the airlines with that sort of traffic pay to go to the biggest hub, heathrow. Otherwise, develop capacity with new runways at Gatwick, City, Luton and you name it. As I say if only we'd had competition when ASI suggested it, passengers would have a much better experience than they get today.

The fruitcakes over at the Green New Deal have another report out today. It's the usual thing, print more money to spend on the things that we like and damn the rest of us. But I did find this little snippet interesting:

“Germany already has twice as many people employed in the renewables sector than in all other energy sectors combined. An estimated 387,000 jobs had been created in the renewables sector in Germany by 2011, far more than the total 182,000 people working in all other energy sectors. By 2020, more than 600,000 people are expected to work in the renewables sector – roughly as many as are currently employed in the automotive industry."

They fail to understand that of course jobs are a cost, not a benefit, of doing something. Yes, jobs are even a cost to the workers: that's why we have to bribe them with real cash money to do them.

We do of course like the things that are produced by people working but we'd much rather have those things with fewer people having to be bribed to get out of bed in the morning. For example, in Germany they have 387,000 people producing some 25% of the electricity and 182,000 producing 75% of it. It would clearly be a good idea if those working on renewables were as productive as those in the other energy sectors. If they were, then 25% of the country's electricity could be produced using only 60,000 workers instead of 387,000: leaving rather a lot of people to go an do something else, find the cure for cancer or tend to elderly.

But our green loons will no doubt dismiss this simple economic reality as just neoliberalism. For they really do see to think that jobs are a benefit of their schemes. So much so that they provide an appendix detailing how many jobs will be created by their plants. I suppose we should forgive them, after we've corrected them of course, but they really do seem to believe that their listing of jobs created is a benefit of their plans, rather than what it is, a guide to the rest of us about how expensive said plans are.

Long time readers will recognise the skeleton of this argument: that solar power is becoming ever cheaper really very quickly. Whichis exactly why we should immediately abolish all and any subsidies for it.

That solar power is becoming cheaper very quickly is obviously true: but it's also true that the general engineering opinion is that it's goint to continue to do so and that it will soon be cheaper than coal produced 'leccie from the grid:

He says the key to making solar panels competitive — whether in the United States, China, or elsewhere — is to bring the cost of installed panels to a level competitive with the current cost of electricity from the grid, without subsidies or tax benefits. Once that goal is achieved — which the researchers estimate will likely occur by the end of the decade — then much larger PV factories will become economically viable worldwide. “This common goal, which can benefit all nations, is an opportunity for international cooperation that harnesses our complementary strengths,” Buonassisi says. Improvements under way in every step of the PV manufacturing process — from thinner silicon wafers to greater cell efficiency to better ways of mounting the cells in a panel — could end up making them highly competitive with other sources of power, Buonassisi says. “Today’s technology is not quite there yet,” he says, but adds, “We could be hitting grid-competitive costs … within the next few years,” which could lead to a surge in installations.

That's just excellent, of course. Cheaper power for all is something to be desired not rejected simply because the current supporters of the technology are ageing hippies. Admittedly, it's a close run thing but that cheaper power does outweigh the hippies thing.

At which point the hippies leap up and shout that it's the subsidies that make solar cheaper so we must continue them. Something which fails on two grounds. The first being that I'm afraid industry doesn't work like that, it doesn't turn on a thruppeny bit. The solar industry has built up a sufficient head of steam that it's going to get there whatever the current level of subsidy: thus we don't need to pay it any more to get to the desired goal.

But the much more important point is that the existence of price efficient solar cells is rather like a public good. Assume that it does become gloriously cheap: no one is not going to sell it to us here in England just because we're English or anything. Quite the contrary, they'll be falling over themselves in order to take our money. Which means that we, the English, can simply stop subsidising solar power in England. We'll wait thanks, wait for that decade or less, then we'll buy the cheap and efficient cells and install them.

Normally we think of the public goods problem as being one of preventing free riders. My suggestion here is the opposite of course: that given the similarity to a public good we should position ourselves to be those free riders. Abolish the subsidies now, wait until the prices comes down some more then install them when they are cost effective without subsidy.

What's not to like about this plan?

Tyler Cowen is recommending a new book about the Simon Ehrlich bet on prices of natural resources in the 1980s. Given my background in the weird metals business thought I'd add the trivial details of why Simon won. No, not the general economic principles of substitution, greater efficient of extraction and so on, but the real reasons, in detail, for the win. The bet was about these metals:

Copper, chromium, nickel, tin, and tungsten

Simon won because copper, tin and tungsten went down by more than the other two went up. But why did those three fall in price? You can track the prices here.

Copper dropped in price in that decade because we worked out a new method of extracting copper. Before the 80s all copper was extracted from copper sulphides. Then someone worked out that a technique used on some other metals, solvent extraction and electrowinning (SX-EW), could be used on copper oxide deposits. Now we always knew that there were mountains (and quite literally mountains) of copper oxide lying around but we didn't know how to get the copper out of them. Now we did and the first plant entered service in 1982. It's not too much of a stretch to think that given a new method of processing entire mountains that the copper price was going to fall. Which it did indeed do.

Tin was a more interesting case. Under the usual UN agreements that we must try to plan everything there was something called the International Tin Council. This tried to manage the world tin price so as to be "fair" to everyone. Not surprisingly, given the cocentration of interest, the producers dominated and so the tin price was kept very high. This increased demand and the tin price started to fall at the end of the 70s. The ITC kept buying in tin to support the price and thus went bust in 1985. Yes, we had the collapse of a producer cartel.

Tungsten, that was a combination of China opening up and the collapse of the Soviet Union. Both led to floods of material out of both countries depressing the price.

This is not to say that Simon just got lucky in this particular decade (as many supporters of Ehrlich try to make out). Rather, that Simon's bet was really that these sorts of things do happen. New technologies are found, market inefficiencies are removed, new entrants do come into markets. And they do so consistently enough that long term prices for commodities like minerals do indeed fall. Simon's ultimate point was correct: I'm just providing the proximate reasons for why that is so.

This isn't as much of a breakthrough as the Mail thinks I'm afraid:

ls 'survival of the fittest' finished? Scientists 'prove' that generosity - not selfishness - is the only way modern civilisation can survive

We've known for some years now that the correct solution to the prisoners' dilemma is tit for tat: as long as the game is running in repeated iterations. And given that life is a repeating series of interactions with very much the same people this is thus the winning strategy in life. If someone cooperates with you then cooperate back: if they do you over then do them over back. We also know from the ultimatum game that people will damage their own interests in order to enforce their vision of fairness. So there's no real surprise about the idea that cooperation works for human beings: we've seen both that in the way that life is actually lived it brings rewards and also that humans seem hard wired to punish those who do not.

Although this isn't really entirely true. For these games and studies have been done pretty much entirely with US students. That's the walking meat that most economists have unfettered accerss to after all. And we do find that when the same games are played with people from very different economies then the results are very different. Whether it is living in a cooperative society that changes the results or that the innate cooperation leads to the different society hasn't been worked out as yet.

However, as sure as eggs is eggs we're going to get someone writing a screed for The Guardian insisting that this finding shows that markets are all icky. You know the sort of thing, if humans naturally cooperate then we don't need all this competition stuff and so should have socialism under the guidance of the wise and all knowing. That group of wise and all knowing always, but always, including the writer and their friends. The problem with this argument being that markets are a form of cooperation.

Indeed, we can go further than that: it's this cooperation in repeated transactions plus the willingness to punish defaulters that actually makes markets work. Those replays of the two games in very different societies show that in generally non-market societies the results are different from those in market ones. And it is those very differences which make the whole idea of cooperating through markets work.

Thus, far from having found that we don't need markets because we naturally cooperate what we've actually found is that we have markets because we all naturally cooperate. Or rather, that those of us who live in market economies do, which is why our market economies work.