Madsen Moment – The Minimum Wage

On Monday we gathered in Parliament's Terrace Pavilion to hear Professor David Neumark deliver the annual Adam Smith Lecture. This year it was on the impact of the Minimum Wage in the USA and the UK.

Building on what we heard at the lecture, Dr Pirie uses this week's Madsen Moment to explain why the policy fails its most basic test – helping the poor.

Reality in the NHS

Last week I went to an 80th birthday party with a difference. The birthday boy failed to show on account of having died two weeks earlier. The family decided to continue with the arrangements, balloons and all, as rather a jolly wake. The family all agreed was that he would have been there if he hadn’t agreed to yet another round of chemo. It was very disagreeable for him and it killed him.

No one is blaming the doctors and nurses. They are wonderful and have the best of intentions. He made the wrong choice or maybe the system made the wrong choice. A man with a hammer goes around looking for nails to knock in. As Atul Gawande showed in his splendid book, “Being Mortal: Illness, Medicine and What Matters in the End” (2014), specialist medical practitioners look to use their skills. It is what they do. The consequence is an excessive number of over-worked specialists and a shortage of geriatric specialists who can take a holistic view.

That is symptomatic of so many areas in the NHS where savings are not only possible but would benefit the patients. One reality is that the NHS will need more money. If the Prime Minister does provide it then she is acting irresponsibly–because she is doing so without also ensuring real reform. For a start, productivity will decrease.

Lord Warner was a Health Minister during the Blair government and witnessed exactly that. His book, “A Suitable Case for Treatment - The NHS and Reform” (2011), documents what happened when the NHS was given large sums of new money but little improved because it is an unchallenged monopoly: “This monopolistic power shows in the attitude of many NHS staff and their resistance to external providers and reform. While I was a Minister, the health team regularly had meetings with groups of NHS staff, with everyone from porters to consultants, but with no senior managers present. When asked what they would most like me as a Minister to do, they invariably asked me to stop change.”  

Listing the areas of NHS waste would take more space than this Blog allows. Some are massive: such as procurement and the external bureaucracy now committed to it. NHS constraints on surgeons and consultants lowers their productivity relative to their private work. Spending £180m a year on back injections and surgeries the medical community decry as useless. Prescribing over-the-counter medicines which the NHS forbids every few years. Refusing to recycle medical devices, such as crutches, or unopened packets of medicine.

Some are less serious: such as throwing away metal scissors and tweezers after one use. They used to be sterilized in boiling water but scientists have shown that “prions” (Mad Cow disease) are not destroyed by boiling. The grand total of UK cases of Mad Cow disease is two in the last eight years, both likely due to long ago blood transfusions from an asymptomatic patient who'd eaten infected beef–with no known instance of the disease being caused by surgical instruments.

The second reality is that the Department for Health and Social Care and NHS have more reasons to conceal waste than to come clean. Transparency would undermine their case for more money and it would increase the pressure for reform. Ministers can be fobbed off with promises of savings (procurement being a good example) without those savings actually being tracked and delivered. Worst of all, as Lord Warner discovered, transparency would mean change.

The NHS, like all those reaching three score years and ten, embarrassingly pretend everything is and will be as it once was. The reality is that the NHS should adapt. That does not mean accepting the whims of a few politicians as led to the unfortunate 2012 Act. We need creative thinking by well-informed experts. There has only ever been one Royal Commission strategically to review the NHS and that was 40 years ago. Be it a Commission or a more informal Convention, let us have a non-partisan strategic review now. Once the consequential reform has been put in place, then of course the necessary funding can flow.

We're very taken with George Monbiot's latest idea

Our general view of George Monbiot is that he spends far too much time thrashing around in ignorance to be a reliable guide to anything very much about the world. Yet there are indeed those times when the frantic search produces the odd nugget of interest. As with this demand of his:

He gets almost everything wrong. But last weekend Donald Trumpgot something right. To the horror of the other leaders of the rich world, he defended democracy against its detractors. Perhaps predictably, he has been universally condemned for it.

His crime was to insist that the North American Free Trade Agreement (Nafta) should have a sunset clause. In other words, it should not remain valid indefinitely, but expire after five years, allowing its members either to renegotiate it or to walk away.

George insists that all trade treaties should have such sunset clauses.

Note what a sunset clause is. It isn't an assumption that matters will continue as long as there's no vote against it. It's also an insistence that one decision once isn't the end of matters. It's an insistence that without a positive vote in favour of some treaty then it falls. No one does get to say that's just part of the settled system, it has to be positively approved every 5 years.

Which would make for an interesting world, wouldn't it? That Single Market of the European Union is a trade treaty. It would need a positive vote in favour of it every 5 years, would it? The Customs Union seems to be similar. And if this applies to trade treaties then why not to other ones? Membership of the UN, the Paris Climate Agreement, Montreal Protocol, why shouldn't these all be subject to that approval requirement? They all failing without it?

Well, of course, we know why not. Agreements approved of by George won't and shouldn't be so subject, those disapproved of should be. But it would be an interesting world if all such agreements were subject to that positive democracy, wouldn't it?  

Chaotic but interesting.

But, but, we're already doing all of this without any plans

The latest bright idea about how the world should be run is that we all have a basic income and that, also, we leave half the planet for that nature to gawp at. We're fine with that to be honest, the question occurring to us being why do we need a plan? We're already doing this.

To usher in a new way of living, the core dynamic of ever-greater production and consumption of goods and resources must be broken, coupled with a societal focus on environmental repair. Two increasingly discussed ideas do just this.

We've not quite managed an entirely dematerialised economy but that online internet stuff seems pretty close to it, consumption without much use of scarce resources. It's also true that as we get richer we take more of that increased wealth as leisure. The population explosion is already over, as they do note correctly. We're an increasingly urban species, thereby leaving ever more room for other species and that gawping at them.

We even, by industrialising our agriculture, are abandoning swathes of land back to that nature - we've mentioned before how New England used to be small farms and is now that regrown forest. There's even reasonable evidence that large parts at least of the Amazon are regrowth, not primaeval.

UBI would give people the right to choose when it comes to fulfilling their own basic needs, and rewilding Earth does the same of other species’ needs. This would be a legacy of a new chapter in Earth’s history that we could be proud of.

We agree that a UBI would be an improvement upon the current welfare systems but it's only a different manner of providing the same basic thing, not a revolution or anything. Every society rich enough to do so does make sure all achieve at least subsistence.

Our point being that we're fine with the basic ideas, aims even. It's just that we on't see why there needs to be a call to action, nor a plan. For what we're called to do seems to be pretty much what we're all doing anyway.

So, why do we need a plan if we're already, unguided and unforced, doing it? 

The latest logical error in the tax avoidance story

We have more evidence concerning offshore tax avoidance by those horrible large corporates. Evidence which will undoubtedly be used the wrong way, to do something which isn't actually implied, let alone proven,  by the research.

Multinational companies shift about 40% of the profits they earn outside their home countries into tax havens, eluding tax-collection efforts, according to an analysis that points to persistent gaps in government revenue collection.

That research is here by Gabriel Zucman and whoever he's got to do the sums this time. There are two basic logical errors here. The first is that they study how profits are shifted around - fair enough. But they then assume that profits which are shifted aren't taxed. This is not so. Sure, Apple might send some large sum of profits off to Bermuda for a rum punch and a tan. That means that EU countries don't get much tax revenue as it passes from them, to Ireland, to Bermuda.

But that doesn't mean that those profits are never taxed. When and if Apple takes it onshore into the US it becomes subject to the tax system there. In fact, Apple just made the largest tax payment by any taxpayer anywhere, ever, on exactly that basis.

It's the second which is the much worse error though. They claim to see little to no evidence that, as standard economic theory predicts, higher taxes reduce investment. "Real investment" as they call it seems to be near entirely uninfluenced by tax rates, it's just the legal form and location of profits which changes.

We can see where this is going to go, can't we? If real investment is unaffected by tax rates then we can tax those profits much more highly, reverse the decline in corporate tax rates, and still gain the same investments! Huzzah!

Except, except, they also show that a very large portion of such taxes are avoided through those offshore arrangements. So, what would we expect the influence of tax rates no one is paying to be upon investment decisions? That is, we can either show that lots of corporate taxation is avoided, or we can show that corporate taxation levels don't make any difference to investment decisions, but we cannot show both that tax rates make no difference and also that they're all avoided. Taxes that aren't paid aren't going to influence all that much, are they?

What this paper doesn't show is that investments, real investments that is, are unaffected by tax rates. But that's undoubtedly the way the paper will be used.

How the Left and Right see each other

There is an old, instructive, Chinese proverb that tells us:

"Never criticize a man until you have walked a mile in his shoes. That way you are a mile away when you voice your criticism. And you have his shoes!"

Its message is that it can be quite revealing to look through an opponent’s eyes. How does the Left perceive neoliberals and free marketeers?

To over-simplify to a perhaps unforgiveable degree, the Left sees the rich comfortably off while the poor find it hard to manage. Those on the Left want to take some of that surplus from the rich and give it to the poor. This would make the poor better off and create a more equal society. This is why they advocate tax increases on the rich, and greater benefits to those less well off.

They see their opponents as being on the side of the rich, wanting them to keep their wealth, and deny the poor the higher standard of living which that wealth would bring them. Not surprisingly, they brand their opponents as both wicked and greedy, wanting to keep the poor in poverty, while allowing the rich to keep wealth that could redress suffering and squalor. This is one reason why so many of them are so angry. They despise what they perceive to be the motives of their opponents.

If they could look at the world through the eyes of free marketeers and neoliberals, they would be surprised to see what they themselves look like. In the first place they are seen as economically illiterate. The neoliberal position incorporates the lessons of the real world, about what happens in practice. They see the Left as over-reliant on pure theory, with insufficient attention paid to the outcomes that result when it is applied in practice.

For example, the Left assumes that a higher tax rate on the rich will bring in more revenue, and they set about calculating how it should all be spent. Neoliberals know something that the Left seem unaware of, that taxation acts to change behaviour. They have seen how higher tax rates can encourage people to shelter income, and deter them from expanding their business or starting new ventures. This can make higher tax rates yield less revenue than lower ones.

Neoliberals look at studies of Corporation Tax that assess where its burden falls in practice. They see that approximately 60 percent of it falls on the employees of an enterprise, some 25 percent is paid by its customers, and 15 percent by its shareholders. They see higher corporation taxes, called for by the Left, not as money taken from "business," but as something paid mainly by employees and consumers.

Neoliberals sympathize with people who have to pay rents higher than they can
really afford, as does the Left, but they disagree with the Left on what should be
done to redress this. 

The Left calls for rent controls, fixing rents by law to levels below market rents. Neoliberals regard this as further evidence of illiteracy, pointing out that below-market rents cause properties to be withdrawn by landlords, or under-maintained, leading to shortages of rental properties. They attribute over-high rents to a shortage of rental properties, and call for
measures that will increase the supply. These might include tax kickbacks to landlords and would-be owners of buy-to-let properties. The aim of lowering rents might be the same, but the centre-right solution derives from real-world experience. It has worked in practice, unlike rent controls which have not.

Seen through neoliberal eyes, the Left seem blissfully unaware that they are repeatedly committing the zero-sum game fallacy, that of supposing a fixed supply where there is none. If the amount of wealth is fixed, for some to receive more, it must be taken from others who will then receive less. Money for the poor must be taken from the rich. Neoliberals observe that in the real world wealth is not fixed, and both poor and rich can receive more if wealth expands.

They observe that in practice, it has not been redistribution that has increased the wealth of the poor, but economic growth and expansion that has made both rich and poor able become richer.

If a policy causes both rich and poor to gain wealth, the Left are concerned if it increases the gap between them, that is, if it increases inequality. Neoliberals are much less concerned about this, observing that in practice their absolute command of resources matters more to poor people than does the gap between themselves and the rich. Neoliberals want poor people to have enough to eat, to provide them with adequate shelter, sufficient heating, access to decent
education, healthcare, transport, and other things people think essential and desirable. They think this matters far more than the gap between rich and poor.

A good thought-test is to ask whether a policy that makes the poor twice as rich should be implemented if, in doing so, it makes the rich three times as rich. To poor people it is the rise in their living standards and access to goods and services in practice that counts. Some theoreticians favour a more equal society, even if it means a poorer one, and will accept living standards for the poor that are lower than they need be, because they think equality is more
important. Neoliberals are more concerned with absolute improvement rather than with relative improvement.

Instead of arguing the merits of opposing theories and predicting what the results of them might be, they point to the actual, real-world experience of free trade and free markets when they have been applied in practice. It is as if a gigantic experiment has been carried out on a global scale. With China and India leading the way, but with many other countries following a similar course, countries that had practised state ownership, state control of industry, and
collective planning and provision, turned instead to introduce markets, private ownership, incentives and opportunities for individual enterprise.

In the three decades since this change of policy was applied, the results have been clear and spectacular. More people have been lifted from subsistence and starvation than ever before in the entire history of humankind. Amongst the poorest, real incomes have doubled, and their food supply has moved from the critical to the sufficient. Countries that hovered on the brink of starvation and were net importers of food have become able to support themselves and be net exporters. Almost every measure of improvement in the human condition that follow from this increased wealth shows that life has become less precarious, with deaths from disease and malnutrition now a fraction of what they were, and deaths in childbirth or infancy down to historic lows on a world scale.

To neoliberals, with their reliance on real-world results, these results count as evidence in favour of the policies that produced them. This evidence is supported by the failure to achieve similar results by countries that did not apply those policies. While it remains possible that alternative policies might produce better results, there is no evidence to suggest that they have done so in practice, or that they could do so. To support the policies that have failed to achieve these practical results appears to neoliberals as evidence of the economic illiteracy of those who advocate them.

If the aim is to improve the common lot of humankind, the policies that achieve this in practice, and that have achieved this, are shown by the results to be superior to those that have not done so. Neoliberals sometimes despair when they see people on the Left advocate policies that have been tried before and have failed before. They ask what use is experience if it is to be ignored in favour of the fashionable theories it has shown were worthless in practice? The consequences of nationalization are known because of the experience of nationalized industries. The consequences of price caps are known because we have seen what happened when they were tried. Too often the lessons of what happened in the past are ignored in favour of speculation about what might happen in the future.

At the heart of this intellectual error lies the notion that society can be changed at will by the application of simple solutions, and that those who oppose this do so either out of self-interest, or because they lack the common humanity to care for the fate of others. Its proponents think that if prices are too high and wages are too low, they should be fixed by law, and that if industries are not producing socially desirable outcomes, then government should run them so that they do. They overvalue the ability of intellect to devise solutions that overcome the
limitations that experience has exposed.

The real dispute is not one of morality, of the virtuous Left versus the wickedness of neoliberalism. It is instead a dispute over methodology. Neoliberals support free trade and free markets because they have been shown in practice to be the most effective means of improving the lot of those at the bottom. They work in practice. The streak of empirical practicality that runs through neoliberalism means that these policies are occasionally modified so that they work better, even if this results in an application of them that is less than pure. The test is practice, of whether they achieve the desired results in the real world.

If the Left could see themselves through the eyes of neoliberalism, they would see people whose motives might be laudable, but whose methodology is not. They are seen not only as economic illiterates, but as ones with no sense of history, no knowledge, or even concern, with what has happened before. They appear as people whose fixation with theory lifts them above the practicalities of the world as it is. Their proposals are just as impractical, error-strewn and doomed to failure as they were the last time they were tried. Human nature as it is, not as it might be, often thwarts their intent. It exists in the real world, where neoliberalism has its roots and works with the grain of human nature, not against it.

Neoliberals take it that the world can be improved, and the lot of humankind made better, but that this is more likely to be achieved by their methodology than that of their opponents. They take it that the results achieved thus far support them in that view.

Crony Capitalism?

Is capitalism failing? In a speech last week at Policy Exchange Environment Secretary Michael Gove argued that capitalism is failing to deliver. He placed the blame on crony capitalism stating: “Economic power has been concentrated in the hands of a few and crony capitalists have rigged the system in their favour and against the rest of us”.

Gove isn’t the only thinker on the right to decry crony capitalism. In my view, it’s a part of an attempt to co-opt the left’s discontent with markets. This is unwise at a time when in many areas our economy is extremely liberal compared to most of history and the rest of the world.

Crony capitalism is a real problem. Misguided intervention in the market can entrench well-connected incumbents, stifle innovation, and increase inequality.

But I suspect too many are overrating the importance of crony capitalism because of its narrative appeal. Rather than a general system of cronyism, we have a capitalist system which mostly works but isn’t allowed to work in specific markets (e.g. housing).

There’s a general imprecision around the term. In Gove’s speech he mentioned the need to “look at the incentives which exist to reward rentiers and promote schemes like share buybacks, rather than encourage productive investment.” But share buybacks don’t detract from productive investments. Rather they release cash from companies with few productive investment opportunities to shareholders who then give it to companies with more profitable projects to invest in.

Gove also brought up executive pay. He’s not the first. Theresa May described it as the “unacceptable face of capitalism”.  But as University of Chicago economist Steven N. Kaplan argues “The reality of executive compensation reveals a far different picture from this caricature of skyrocketing pay packages and crony capitalism.” He and his colleague Joshua Rauh looked at 1,700 firms and found “that compensation was highly related to performance: The companies that paid their CEOs the most saw their stocks do the best, and those that paid the least saw their stocks do the worst.”

Part of the problem is that crony capitalism has become a catch-all term. It no longer focuses purely on cases where cronies have prospered by taking advantage of political connections. Attacks on crony capitalism too frequently devolve into attacks on capitalism.

In reality, the real ‘cronies’ are typically not CEOs. Rather they cut a sympathetic figure. It’s the NIMBY homeowner opposing new development because “it’s not affordable” and will “put pressure on local services” or the barrister that wants to protect the public from insufficiently trained solicitors.

In many cases, crony capitalist outcomes are the result of lobbying from consumer groups. Take OfGem’s Non-Discrimination Condition which banned energy companies from charging consumers less in one region and more in another. It resulted in less competition and higher margins.

It is easy to make the case against “fat cats” profiting off political connections, but it’s harder to target well-organised and often sympathetic interest groups. Yet all the evidence points to the latter causing the most harm. That’s especially true in the case of restrictions on building new homes, which Moretti and Hsieh estimate leads to a 13% reduction in GDP in the US.

In his speech Gove was right to link popular discontent and the shift to populism to falling productivity growth. But addressing sluggish wage growth will require tackling popular special interest groups, not just easy targets.

And to think that some people want to nationalise the railways

We're all aware that lots of people would like the railways to be nationalised again. Centrally run by the planners who, no doubt, will plan everything to perfection. The argument being supported by an insistence that the current set up isn't, when it comes right down to it, very good:

For hundreds of thousands of commuters, a rail timetable change will never seem innocuous again. Before the schedules were switched three weeks ago, plenty of people had predicted teething troubles: train companies had spoken of the logistical challenge ahead, and commuters were told to expect some initial disruption.

At the time, Govia Thameslink Railway (GTR), a key commuter franchise that runs a sprawling array of routes from Brighton through London to Luton and beyond, seemed to have put recent problems behind it. There had been warning signs on Northern, which covers cities including Manchester, Liverpool and Newcastle. But still, the sheer scale of cancellations, delays, confusion and misinformation that arrived with the new timetable came as a shock.

One rail grandee had predicted problems. But Sir Michael Holden, a former boss of East Coast, said thechaos had surprised him. “Never in my worst nightmares did I imagine it could conceivably be anything like as bad as it is,” he said.

Hmm, OK, that is a bit bad, isn't it? Why has it been so bad?

This blow to the reputation of England’s railways came, ironically, at what should have been a moment of triumph. Instead of the usual twice-yearly tweaks, the national timetable was to undergo wholesale revisions to take advantage of new technology, new trains and years of engineering work. The Great North Rail project, which included electrification and the construction of a new piece of track, the Ordsall Chord, was designed to allow more trains to travel through Manchester, speed up journeys and make new direct links possible.

In the south, commuters were set to reap the fruits of a project so long in the gestation it was once called Thameslink 2000: a £7bn overhaul that included rebuilding London Bridge station, adding modern signalling and buying new trains so that dozens of services could pass per hour with automated, Tube-style frequency. Every single train timing was redrawn on GTR’s franchise in an attempt to harvest the benefits of that work, add extra services and – laughable though it sounds now – increase reliability.

Ah, they tried to change the whole system, at once, as a central planner would, instead of a bit or organic tweaking here and there as a proper market system would.

We're then to use the failure of that centrally planned approach, that convulse the system into the one big change, as a justification to have a centrally planned system subject to convulsive heaves into change, are we? We just can't see the logic there ourselves.

Looks like that rental problem is being solved

The Guardian gives us another whingefest over the price of rental housing currently. To which the correct answer is yes, we know there's a problem, so, what are we going to do about it? Stop concentrating, for a moment at least, upon the ghastly inequity of it all and tell us how to solve it.

At the end of which whingefest we're told:

Last year, the Association of Residential Letting Agents (Arla) said: “We expect the situation to only get worse for tenants when inevitably the costs are passed on through higher rents.”

The good news is that Arla was wrong. The average UK rent rose by just 0.75% in the past year, and fell in London, according to the Landbay Rental Index. Landlords need to remember that they can huff and puff about squeezing tenants for more rent, but tenants have only got £23 left.

Real rents are falling and even nominal rents in London are. Hmm, so, something is being done and the problem is, however slowly and hesitantly, being solved. That's good then, but how? 

As it happens a builder has just released its results:

Telford Homes plans to increase the number of rental homes it builds as demand from investors to enter the sector intensifies.

The company will develop more so-called build-to-rent schemes in London over the coming months, and its board “continues to evaluate” whether a formal partnership with an investor could enable it to build rented homes more quickly to grow its division.

“We are increasingly being approached directly by institutions and rental operators seeking investment opportunities and each trying to achieve significant scale as swiftly as possible,” the company said.

Chief executive Jon Di-Stefano said the amount of money targeting the sector was "phenomenal". 

Large scale investors are, well, investing we suppose, in the sector. Putting their money to work in building housing that people can then rent. Prices of rental housing are, concurrently, falling.

Perhaps, just a possibility, all that stuff about markets actually works then? The price of something is determined by that intersection of supply and demand. Increase the supply and the price falls. Sure, it's all most unpopular to believe such neoliberalism but it does seem to be a reasonable description of reality, doesn't it? Build more housing and housing becomes cheaper.

Note what is not necessary for this to happen. That the house built be determined to be "affordable," that tax money be used to build them, that they be not for profit, nor even that the developments be centrally planned by the wise oracles who would determine our lives. Simply allow that market red in tooth and claw to operate - here, by actually allowing people to build stuff - and we get to solve those problems of a shortage of supply and the consequent high prices.

The first two pages of every economics book ever are correct then. Now all we've got to do is run the rest of the country in accord with that basic insight about our species and this universe.

We agree with George Monbiot - industrial farming it is then

George Monbiot uses a recent paper to argue that we should all give up meat and dairy because there are more efficient manners of growing a minimal diet. Quite possibly there are but then who wants to live a minimal life, subsist upon a minimal diet? The point is not existence but utility maximisation, no? 

However, he is right about this:

 The most important environmental action we can take is to reduce the amount of land used by farming.

As has been pointed out numerous times any form of organic farming requires more land than industrial such. Simply because, at root, industrial farming is the substitution of the products of factories and chemical vats for more land.

Though roughly twice as much land is used for grazing worldwide as for crop production, it provides just 1.2% of the protein we eat. While much of this pastureland cannot be used to grow crops, it can be used for rewilding: allowing the many rich ecosystems destroyed by livestock farming to recover, absorbing carbon dioxide from the atmosphere, protecting watersheds and halting the sixth great extinction in its tracks. The land that should be devoted to the preservation of human life and the rest of the living world is at the moment used to produce a tiny amount of meat.

Assume this is true, now, do we have any evidence that efficient farming does free up land for such rewilding? Actually, we do., New England. A century and a half back the area was a quiltwork of small farms. The forests we go to gawp at in autumn didn't exist, they'd been clear cut. What we do go to see these days is almost entirely new growth. Rewilding that has occurred as a result of mechanical farming and the railroads opening up the mid-West.

We get our food from the more efficient land and production methods these days. The contention that doing so allows rewilding is proven. Which is why we should indeed be using those industrial farming methods, precisely and exactly because they reduce our call upon the land, leaving more of it for other forms of life - and for us to go gawp at.

If your argument is that we should eat a particular way in order to reduce the land we use to feed ourselves then you are indeed arguing against organic farming and in favour of industrial such. Odd how the usual suspects tend not to make the connection, isn't it?