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"Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice" - Adam Smith

This is really an extraordinarily bad idea

Written by Tim Worstall | Tuesday 20 August 2013

A very seriously bad idea in fact. The point being made is that spending tax money does lovely things. Which indeed it can do. Therefore we shouldn't worry about how we raise the tax money, nor study the costs of doing so, because spending it all is so lovely.

Economists usually think of taxation as inefficient. This column argues that the anti-tax rhetoric evident in much lay discussion of public policy draws considerable support from the prevalent negative language of professional economic discourse. Optimal income taxation doesn’t have to employ the pejorative concepts of inefficiency, deadweight loss and distortion; and this column argues that it is high time for economists to discard them and make analysis of taxation and public spending distortion-free.

This is entirely tosh of course. For it is indeed true that we can do wonderful things with the spending of tax money. I think vaccination is just great, as with a criminal justice system, only one national defence system and so on. But in order to be able to reach that decision I have to look at the benefits of the spending of the tax money as against the costs of having raised that tax money.

And this is where the first level of talking about deadweight costs comes in. A reasonable rule of thumb is that raising £1 of tax means that there's 20 pence worth of economic activity that doesn't happen. At the sort of marginal rates we have now, more like 30-35 pence. Which is fine at times: I think the herd immunity that comes from near universal vaccination (as we can see from when it doesn't happen as with measles these last few years) is worth 135% of the money that is spent on it. The benefits are larger than the deadweight costs that is.

But I also would point to areas of public spending where this test is not passed. I don't, just as my standard example, think that diversity advisers are worth 135% of the money spent on them. I don't think they're worth 2% of it but that's another matter. But they're, to my mind of course, not worth the loss of those deadweight costs: they thus make us poorer in aggreagate, not richer, and making us poorer really isn't the aim of the whole game. Please do note that while there are people who will disagree with me on the value of diversity advisers pretty much everyone has some area of tax funded expenditure that doesn't pass this simple test. Usually, those in favour of the advisers would be against something I'm in favour of, say, Trident.

So that's the first part of why we don't want to ignore deadweight costs: it's the only method we've really got of deciding whether it's worth doing something out of tax revenues or not.

The second is of course that different taxes have different deadweight costs. So, how can we possibly design a tax system for efficiency if we don't look at the efficiency of the different taxes? Sure, there's equity to consider as well: consumption taxes are more efficient than income taxes and one can certainly argue that they're more inequitable. But if we stop measuring these things then how on earth can we come to a rational decision about which we prefer?

So I'm afraid that I really do think this is a very bad idea indeed.

I also have my suspicions about what is driving the idea too. The writer would like higher taxes so that government can "do more". And he'd much prefer that no one started to come up with pesky little arguments about why government might not be the best method to get more done. An easy way of doing that is simply to forbid any discussion about the way in which governent and taxation might not be all that efficient....

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Worse than nothing

Written by Tim Ambler | Monday 19 August 2013

Like many countries, the government offers advice to new and would-be exporters. If the advice is sub-standard, it may be worse than no advice at all.

The organisation charged with this function is called UK Trade & Investment (UKTI) and is a combination of civil servants from the Business (BIS) department, Foreign and Commonwealth Office and staff “volunteered” by their companies. It is about 2,500 strong, half overseas and half in the UK. UKTI’s Annual Report is a challenge to the reader as they are preoccupied with whether these are FCO or BIS staff and confused between the very distinct roles of helping export as and helping overseas investment in the UK.

Most of the overseas staff are locals who know little or nothing about the new and would-be UK exporters. Only about 10% of the total are actually engaged, on the ground, in advising UK exporters. They are far outnumbered by their colleagues drinking tea in Whitehall meetings.

Should we look at the quality rather than the quantity of advice?

Firstly there is no sign in the UKTI that they benchmark there advice against academic studies or the advice given by other countries. How do we know how the UK advice rates if we have no idea of the quality of our competitors’ advice? In fact the Australian advice, for one, is much better.

20 years ago Chris Styles, then working on his doctoral thesis and now Dean of the Australian Graduate School of Management, and I researched, for the then Department of Trade and Industry, what did and did not work for new exporters. The research conclusively showed that the government’s standard advice that one should choose the market through formal market research and then oneself draw up a marketing plan was comprehensively wrong. Numbers only reveal the state of play, not what a market could become, still less what it will become since that depends on what the exporter will do. Were Iceland, for example, to have no fridges, would that imply a potential demand for fridges or simply a dislike of, or no need for, fridges?

Relationship with the importer proved to be the crucial thing: the better and stronger that relationship, the better was the performance.

This blog does not have space for all the detail. Suffice it to say that the DTI accepted all our findings both empirical and theoretical. Checking current UKTI advice, however, shows that they has reverted to the same old rubbish we disproved 20 years ago. It was wrong then, it is wrong now and British exporters are being misled. 

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The environmental Kuznets Curve is alive and well in China

Written by Tim Worstall | Monday 19 August 2013

It's a standard trope these days that China is so alarmingly polluted that it's killing off the population in droves. And that might actually be true in part as well. But all that filth is the side effect of people not being killed off in larger droves by the absence of food, shelter or industry.

Which is where the environmental Kuznets Curve comes in. It's a fairly simple idea: when people are just struggling up out of peasant destitution (please do recall, in 1978 China had the same GDP per capita as England in 1600) they don't particularly care about air pollution, water pollution and the rest. They're too focussed on this wonderful new idea of being able to expect three squares a day. As wealth increases then Maslow's heirarchy of needs comes in: OK, so now we've enough to eat, clothes, houses, maybe we ought to do something about that choking black smoke: we'll spend a larger portion of our new wealth on matters environmental that is. The curve is simply constructed from these two points: another way of putting the same thing is to say that matters environmental are a superior good. We're willing to devote a larger portion of our incomes to them the higher our incomes become.

All of which is generally understood but there are those who insist that China's current pollution is something exceptional. Well, no, not really. It's about right for its current level of development actually:

 

China is broadly right about one thing: its environmental problems do have historical parallels. With the exception of Chongqing, the largest municipality, most Chinese cities are no more polluted than Japan’s were in 1960 (see chart 1). Excluding spikes like that in Beijing this year, air quality is improving at about the same rate as Japan’s did in the 1970s.

And not dissimilar from the UK in the 30 and 40s: something that makes sense given that China's GDP per capita is now about what the UK's was in 1948.

People do indeed want to have a clean environment. But as it happens they also like to eat, have the basics of a bourgeois life, more than they like a clean environment. It's only after those basics have been achieved that we're all willing to spend our still rising income on that green and pleasant land.

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What Keynes got right and wrong about investment

Written by Tim Worstall | Sunday 18 August 2013

This is a fascinating paper about the performance of Keynes as an investor. It looks at the performance of the one of the King's College investment funds over the couple of decades that Keynes has total control over the investment allocation. There's one thing that he got absolutely correct. The basic investment strategy of the time was to be in bonds, government securities and so on. Keynes saw that stocks were likely to be a better bet over time: as indeed they have been since then. So a gold star for that.

It's the other point being made about his investment strategy which I think is more important. He started out by looking at the macroeconomy. Trying to time investments on the basis of the ebb and flow of the economy as a whole. And in doing so he managed to underperform the market significantly. As ever when money is involved the loss of it forced him to reconsider his approach. At which point he became what we would today call a "value investor". Damn what the economy is doing as a whole and look at what specific companies in specific sectors are managing to achieve. Or, given that stock markets are forward looking, what they're likely to achieve.

Over the entire time period Keynes was very successful in investing these funds. But it was the gains from the second form of investing that made up for the losses of the first. And here's what really amuses me about this story. Keynes is, of course, regarded as one of the great macroeconomists. Indeed, he defined the way in which most macroeconomists currently attempt to describe the world around us.

But in order to be a successful investor Keynes had to stop being a macroeconomist and look instead to the microeconomics of what was going on. And I think there's an interesting little lesson for us all there. Micro is much more important than macro perhaps?

 

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Solar power's going to be great: which is why we shouldn't be subsidising it today

Written by Tim Worstall | Saturday 17 August 2013

I'm a firm believer that all of this climate change thing is going to be solved by the application of human ingenuity. You might call me a Simonite on that point.I'm also absolutely certain that solar power is going to play a large part in that solution. There's just so damn much of it available that it would be near mad insane of us not to use it. At which point my insistence that we should not be subsidising the installation of current solar power is going to seem most odd. However, I refer you to Mike Munger:

In 20 years, solar will be useful, and used. But it's a mistake to spend our money now on an immature and still not well-engineered solar generation system.

I'd argue on the 20 years: it's going to be much sooner than that. Solar power depends upon a variant of Moore's Law (in part, at least, and then further on the efficiency with which silicon metal can be made, something increasing by leaps and bounds as well) and it's getting more efficient faster than most realise. Or more productive perhaps, to bring the falling price of it into play.

The usual argument at this point is that since solar will become efficient at some point in hte near future then we've got to subsidise the installation of it right now. Which is absurd of course: that it will be grid comparable in general (rather than just in specific locations, as now) in the near future is exactly why we shouldn't be offering any subsidiy at all for installation of the current, not efficient, generation. And the closer that near future is the stronger the argument against subsidy. If the next generation of solar, available in, say, 2015, will be cheaper than coal (a claim some make although I'm not sure it will be that quick) then why one Earth would we waste money installing not efficient solar in 2014?

Save the money and install the efficient stuff in 2015. This is true whatever your timescale for solar becoming efficient is. The more anyone insists that it will become efficient the more they ought to be arguing against the subsidy of the installation of the current generation of inefficient solar.

Subsidy for development, for R&D work, that's different, with a different set of arguments. But subsidy for the current installation, for 25 years of subsidy through feed in tariffs, when we're all also arguing that unsubsidised efficient kit will be available in 2 or 5 years, is simply ridiculous. Wait and install the good stuff instead of littering the countryside with the current bad kit.

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How Milton Friedman actually won

Written by Tim Worstall | Friday 16 August 2013

I think this little piece from Noapinion manages to get this entirely and completely the wrong way around.

I can only imagine how Friedman must be turning in his grave. His academic legacy is probably what he would have wanted...but his political legacy has been to be conflated with some of his most bitter intellectual opponents, to have their ideas ascribed to him, and to have his own ideas reviled by the people on his own side of the political spectrum.

The specific arguments that Friedman made and which are now not liked much by the right in the US are:

Friedman's ideas are pretty close to the mainstream New Keynesian idea of the macroeconomy - the kind of thing promoted by Mike Woodford, Smets and Wouters, Greg Mankiw, and Miles Kimball. New Keynesian models use consumption smoothing, monetary policy rules, and a NAIRU with a downward-sloping short-run Phillips curve - all Friedman ideas. And in New Keynesian models, monetary policy reigns supreme; only at the zero lower bound is monetary policy possibly ineffective. That's a very Friedman idea too. Furthermore, as mentioned above, the policy of Quantitative Easing - which takes us beyond the New Keynesian framework - was what Friedman explicitly suggested for Japan.

This isn't a failure of a political legacy: this is success! To be able to convince your "own side" of the sensibleness of your policy prescriptions is all very gratifying. But it's hardly victory: victory is persuading everyone, so that your ideas become simply part of the mainstream of generally held opinion. That every central bank (except the benighted ECB of course) greeted the recent financial crisis with QE is a glorious victory for the Friedmanite idea that what the Fed really screwed up in 1931-38 was the money supply as laid out in A Monetary History of the United States. That the entire world marches to your drum beat is victory, not failure to be mourned.

On a very much smaller scale we here at the ASI think the same way. Sure, it was Red Ken who brought in the London Congestion Charge: but the idea was nurtured here for years. We don't care who implemented it, it's a great idea, one of ours (and Alan Walters') and we do indeed dance that little victory jig when we think of it. Far from Friedman turning in his grave he'd be celebrating how what was once one of his more outre ideas is now the political mainstream. He won in short.

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A little something from the frontlines of international industry

Written by Tim Worstall | Thursday 15 August 2013

Most of you will know that my day job is dealing with the weirder end of the metals market, most especially the rare earth scadnium. This popped into my inbox as a result of one of those automatic alert jobbies:

Guangdong Orient Zirconic Ind Sci & Tech Co. is going to spend 30 million yuan ($4.9 million) to build facility to recycle scandium from zirconium oxychloride acid mother liquor. It will take six months to construct the facility, Orient Zirconic told Shenzhen Stock Exchange on August 10. When completed, the facility will have production capacities of 2,500 kilograms for high purity scandium oxide a year, 20 tpy for mixtures of rare earth oxides and 150 tpy for zirconium oxychloride, it said.

I don't know this particular company and have no contact with them. But those numbers all look about right, believable certainly. For I have looked at that (and many other viable ones) method of extracting scandium. It works, no doubt about it.

The thing I'd just note though is that they're going from a standing start to production in 6 months. If I were to pursue exactly the same technology here in the European Union it would take me 18 months just to get the environmental permit to proceed.

No, I don't advocate Chinese levels of environmental non-protection. But I do want to point out that such protection does come at a price: it takes much longer to do things therefore economic growth is slower than it would have been without such enviromental protection. It might even be that the level of protection we have is the right amount: I really do just want to point out that it comes with a cost attached to it.

And we have all noted that economic growth has been slower in recent decades than it was in those before we imposed the current level of regulations, haven't we?

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About the effect of the UK's shale gas on prices

Written by Tim Worstall | Wednesday 14 August 2013

I find myself entirely jaws agape at one of the arguments being used against the exploitation of shale gas in the UK. Roughly expressed here it's that because it won't move prices very much then we shouldn't bother to do it.

The heart of the argument is that because we're all tied into the Great European Gas Market then whatever amount of shale we drill up in the UK will only be a small part of the GEGM. Stuff that comes up from under Blackpool will be piped off to Lodz for example, and thus prices really won't move very much. Something which I'm perfectly willing to believe by the way: the addition of a small amount of marginal supply to a vast market won't in fact move prices very much. Indeed, there's one report out there (by Poryry) that states it will move prices by only 4%.

4% isn't worth it so let's not frack our Green and Pleasant land then.

Leave aside the technical arguments (about LNG, pipeline capacity etc) about why this might not be entirely true. Think instead about what the basic statement being made here is.

They're actually saying that all gas in Europe, for all European consumers, will be 4% lower as a result of fracking Lancashire. That's 500 million people save 4% of their power bills (yes, the reports do indeed say that electricity will be cheaper as well given the use of gas to generate it).

Let's, very roughly, try to work this out. 500 million people is perhaps 150 million households. A UK duel fuel bill for a household for a year is £1,200 or so I believe. 4% of that is £50. Yes, many estimations in those numbers. But lowering gas prices for all European households thus saves those households some £7,500,000,000 a year. That's real money even when talking about things governmental.

Fracking Lancashire makes the households of Europe £7.5 billion better off.

Per year.

A little bit of money saved by lots of people is lots of money.

Now, the only counter-argument to this is that in fact the gas we frack won't be perfectly transportable and substituitable for the domestic supplies of Naples, Wroslaw and Lisbon. Which is also something I'm prepared to believe. In which case that tiny marginal addition to supply for all of Europe becomes a much larger additional supply to that part of Europe (say, perhaps, the UK alone) where gas really is perfectly transportable and substituitable. And a larger additional supply relative to market size will drive down prices further.

This is why I'm jaws agape. Their argument is either that lots of people will benefit a bit or that few people will benefit a lot. Either way, it's billions in benefit. This is an argument being used against fracking?

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The difference between this capitalism and this free market stuff

Written by Tim Worstall | Tuesday 13 August 2013

I've a long piece elsewhere looking at the effect of WalMart on the US economy. The basic contention is that the consumer surplus of the company (and possibly Big Box stores in general) is vastly larger than the amount that the owners of the original company have managed to keep for themselves:

The entrepreneurs end up with a lot less of the wealth created than the consumers do. 30 years worth of $300 billion a year in consumer savings is some $9 trillion. In return the (inheritors of) the original entrepreneur has got $100 billion. And yes, to make the point again, that capital value of $100 billion is the net present value of all of the profits they’ll make far off into that future.

Now where I come from (so different that we call it maths not math) our math system tells us that $9 trillion is a rather larger number than $100 billion.

The more sophisticated point that I want to make here is that this is a good example of the different effects that can come from capitalism and from free markets.

In a purely capitalist system, one that did not allow competition, there could still be that same value created: but the distribution of it would be very different indeed. Without any competition at all it would all accrue to the entrepreneurs (although we might possibly expect some goodly portion to leak through to the production labour dependent upon the level of unionisation). With competition however we find that others note the new technology (and yes, WalMart is really just a new technology for retailing) and copy it as best they can. This leads to this very different split of the benefits: the vast majority now accrues to the consumer. For the various people using this new technology must continually cut their prices as the others using this same new technology do so.

Which is, of course, where we want the benefit to be accruing, to the man and woman in the street, this is the point and purpose of the economy. To make the average person as rich as we possibly can.

Which gives us our subtle point. Capitalism might well be a useful way of harnessing greed to encourage people to invest, to produce and roll out new technologies. But it is those free markets that spread that added value throughout the society. Markets, if you prefer, ameliorate the effects of capitalism: which is why they are so damn important, obviously.

 

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Chart of the week: UK unemployment falling only slowly

Written by Gabriel Stein | Tuesday 13 August 2013

Summary: UK unemployment is slowly heading down – but fall likely to speed up

What the chart shows: The chart shows the UK rate of unemployment as a three-month centred moving average

Why is the chart important: Following the lead of a number of other central banks (most recently the Federal Reserve), the Bank of England has now embarked on a course of ‘forward guidance’. This is an attempt to lay out the future course of current monetary policy over a longer period of time. The new Governor of the BoE, Mark Carney, has said that Bank Rate will remain unchanged until unemployment falls to 7% from its current 7.8% level (June 2013). The Bank says this will occur in 2016. In contrast to developments in the United States, UK unemployment has been slow to fall; perhaps because it did not rise by as much during the Great Recession. However, the UK economy is now giving all signs of surprising on the upside. This means that unemployment (which is a lagging, not a leading indicator of activity) is likely to start falling faster. Given that inflation is already above the Bank of England’s target, Bank Rate will almost certainly rise well before 2016.

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