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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

Of course we should stop subsidising arts degrees

Written by Tim Worstall | Sunday 04 August 2013

Not that we particularly do subsidise arts degrees, not in England we don't. Students now borrow to pay the course fees for the subjects they study which is as it should be. But some interesting research about why we shouldn't ever go back to subsidising arts degrees whatever else we do with tertiary education. The basic point being that hard and social science degrees contribute to economic growth. Arts degrees do not. The full paper is here but this is probably an easier summary.

Cristiano Antonelli and Claudio Fassio decided to open this Pandora box and concentrate on one impact: economic growth. They perform a cross-country study and take the number of graduates in each field as an indicator of academic output, and see where that leads us in terms of economic achievement. They make the distinction between engineering, hard, social, medical sciences, and humanities in a 11-year panel of 16 OECD countries. The horse race ends with two clear winners, engineering and social sciences, and two big losers, medical sciences and humanities, the latter having a significant negative contribution to growth.

The argument generally deployed is that having a better educated population increases economic growth: thus there should be subsidy to that education. Which is fine of course, but as this paper shows it does rather depend upon what sort of education produces the economic growth. And as we see, the social sciences and hard ones do indeed produce that growth and so there's an argument for subsidy. That the arts degrees do not produce that growth means that this particular argument for their subsidy fails.

But do note that last little part of it: arts degrees reduce economic growth. Quite why: well, have you ever actually looked at an arts degree syllabus these days? They might well instruct well on the importance of feminism to Jane Austen, say, but they do seem to misinform about everything else political and economic. Or it could be of course that it's just the opportunity costs: having intelligent people spending years arguing over the importance of feminism in Jane Austen is a drag on the economy when they could have been out designing bridges instead. Or even serving the coffees that their graduate degree will prepare them for.

But such gross cynicism aside this economic result does indeed lead to an interesting policy idea.

We're all familiar with the idea that there are externalities, that such externalities need to be corrected with the addition of a Pigou Tax. This is simply the flip side of the argument that positive externalities (like, say, the public good of economic growth coming from science education) should be subsidised. Those science and social science degrees produce that increase in economic growth which is indeed a public good worthy of subsidy. Those arts degrees produce a negative externality which must be corrected by a Pigou Tax.

At which point the correct policy is obvious: we should charge the arts students twice the normal fees in order to subsidise the science students. It's a win/ win situation I feel.


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Of course big business loves regulation

Written by Tim Worstall | Saturday 03 August 2013

An interesting little point made in the Telegraph:

In the debate on Britain’s relationship with the European Union, you hear two types of response from business leaders. The first, given generally by those who can afford to pay for large teams of lawyers, compliance officers and Brussels-based lobbyists, is one of tentative approval. The second, inevitably provided by the bosses of small and medium-sized enterprises where every penny must be accounted for and most members of staff have more than a single role, is one of resignation verging on outright hostility.

The point being that big business doesn't really mind regulation because it has the capability of dealing with it while small business hates it with a passion because it does not.

But it actually goes rather further than this. Big business positively delights in much regulation. To understand this we've got to be clear eyed in our appreciation of what the market is really all about. Capitalism, and big businesses are decidedly capitalist organisations, is indeed all about making profit. Get the most out of whatever it is that you're doing. It's the market, the competition that it allows, which is what tempers this this profit gouging. You can't charge what you like for a pint of beer because there's another pub around the corner. Or the supermarket and the couch in front of the telly. Or France sells beer to take home as well.

What regulation does is favour both the incumbents in any activity and also large companies in anytihng at all. For what worries business is not whether they're allowed to do something or not: but that other people will find a better way of doing it and thus compete. More regulation means that fewer upstarts can enter the market and any that do are hobbled by that regulation. The more regulation the more the current large companies can continue to be capitalist without having to worry about their practices being tempered by that market competition.

Which is, as I say, why large companies just love regulation. The problem here is of course that it's also large companies that do all the lobbying. Further, that it's the small and new companies that do most of the innovation and nearly all of the job creation. Meaning, in the end, that it's precisely because large companies so like regulation that we should have less of it.

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Postcode petrol prices

Written by Dr. Eamonn Butler | Friday 02 August 2013

Transporting fuel to Scottish islands is an expensive business. This in turn makes motoring on the islands more expensive. The UK government's solution? It gives a 5p/litre reduction on fuel duty on the islands. Which means millionaires who've retired to Arran enjoy a subsidy from poor motorists on the mainland.

So now everyone else wants to get in on the act. There is an election coming up, of course, and now people on 'remote' parts of the mainland – Devon, Northumberland, North Yorkshire and Wales could be in line for the same cut. The Treasury is asking petrol retailers and customers in 25 Counties to provide details of their prices. Well, we know what they are going to say, don't we?

Don't get me wrong. I'm in favour of any tax reduction of any size on any thing at any time in any place. Taxes are far too high. But as well as being low, taxes should be simple. If you are going to tax fuel, or alcohol or incomes or anything else, tax them equally: don't try to use taxes for social engineering. The long-run results won't be happy.

Back in the 1970s, when the UK gave subsidies to 'assisted areas' that were thought to be in need of special support. Of course, everyone wanted the subsidy, and before long, the entire country was one vast 'assisted area' apart from a small pocket in the South East. That is where this kind of me-too politics takes us.

Politicians should not be empowered to favour any particular groups. They should treat us all equally – if we allow them to discriminate, the opportunities for corruption are huge. If people choose to live in remote places, they need to accept the costs of that – along with the benefits, which might include scenery, solitude, simplicity and much else. We should not tax them for the latter and should not subsidise them for the former.

By manipulating the tax system, politicians skew the decisions people make about where they live and what they do. Bit by bit, we end up gravitating to the subsidised places and working in the subsidised industries – instead of going to where we can be most productive in the most productive industries. And then we wonder why the country is broke.

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Government in doing something sensible shocker

Written by Tim Worstall | Friday 02 August 2013

Sadly though it's not the government that we groan under the yoke of, but the Australian one that has just done something extremely sensible. You may or may not recall that a few weeks back various Oz MPs were getting very hot under the collar about why various tech products cost a lot more there than they do in other countries. They called in the execs and had at them and various fairly weak justifications were offered. Transport costs, small market, high costs of infratstucture and so on. No one quite had the chutzpah to point out that they were simply profit maximising businesses. They charged more in Australia because they could charge more there and that's simply it.

It does appear though that the MPs uderstood what they weren't directly told, for:

Acknowledging that companies have the right to decide the pricing of their own products, the committee made a number of recommendations to address the price of goods in Australia.

Ooooh! What?

It wants the import restrictions in the Copyright Act, 1968 removed and add a clause to allow consumers to circumvent geoblocking to ensure they're getting the best price. It also wants to teach Australian consumers how to get around geoblocking and provide more access to technologies that allow them to do so. Needless to say they will also need educating on how far Australian Consumer Law allows them to go on this.

• If companies do not agree to lift geoblocking, or to give consumers the tools they need to circumvent it, the committee recommended enacting a ban on geoblocking "as an option of last resort". It also recommends voiding any law which seeks to enforce geoblocking.

Blimey, can I emigrate? Politicians make recommendations, based upon the evidence and further, recommendations that will actually solve the problem?

For the companies charge higher prices because they can. Remove their ability to do so by removing the artificial restrictions upon consumers and they will no longer be able to charge those higher prices. Thus they won't.

Isn't this so joyfully different from our own dear Margaret, Lady Hodge, and her practice of offering soundbites without demonstrating any understanding of the basic underlying problem?

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You really cannot just plan economies you know

Written by Tim Worstall | Tuesday 30 July 2013

It's one of the standard conceits that the man with a plan can make society better for us all. The standard response to this conceit is Hayek's point, that no one can have enough information in sufficient time to be able to make or manage such a plan. That's why we have to use markets as they're the only information processing and calculation engine we've got that is capable of doing the job. There are, of course, people who prefer to shout that Hayek's all wet and that their plan would undoubtedly work. Fortunately we've already run the experiment, we generally call it the 20th century, and we now know that Hayek was indeed right.

All of which leads to this interesting little tale:

Migration statistics are "little better than a best guess" and probably understate immigration to the UK, a parliamentary report has revealed. With immigration again set to be a key battleground during the next election, a report released today by the Public Administration Select Committee warns that the statistics are not fit for purpose.

Because of the unreliability of the figures, the report adds, the Government should aim for a target of 50,000 if it wants to reduce immigration to under 100,000 by 2015. Estimates of immigration, emigration and net migration are primarily based on a sample of 800,000 people interviewed at ports and airports each year, known as the International Passenger Survey. But only about 5,000 of those tend to be migrants and, in addition, the report comments, these "may be reticent to give full and frank answers, to say the least".

This means that the Office for National Statistics and the Home Office are producing "blunt instruments for measuring, managing, and understanding migration to and from the UK", which do not, the report says, measure the impact of migration on local areas, the social and economic impacts of migration or the effects of immigration policy.

Or as we might put it, we cannot "manage" immigration or the effects of it because we've got no clue at all about how much of it there is. We don't, in fact, know how many people there are in the country, let alone how many of them are native born (it's actually Polly Toynbee who has been saying for years that sewage processing requirements show that there's more people in the country than there are on the books). In such circumstances we simply cannot go about trying to manage things like housing: given that we've no clue of the number of people we can't decide how many houses and or flats there should be. We can only start to look at what the markets are telling us: prices are rising, in fact are at Ungodly levels, and so we need to have more houses and or flats.

How many more? I don't know, you don't know and the government can't possibly know. Just more until we stop having house price inflation.

I should end here with a clarion call to something or other. But I'm not sure that this rises to that level: perhaps a clarinet call. We really have run that experiment about planning and markets. Given that we've received the results, can we please start paying attention to them? We simply do not have, cannot have, the information we need to plan things. That's why we have to use markets.

Simples really, isn't it?

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Modern religion is just so confusing

Written by Tim Worstall | Sunday 28 July 2013

You know I'm sure that somewhere in the foundational documents of Christianity somewhere there's a story about how the money lenders and the Temple aren't supposed to be too closely entwined. I think that was one of the stories beaten into me over those years at the hands of the monks at least, vague memories of shouting and tables being over turned as our man JC told them to get out of his father's house. But here we have the new Archbish of Cantab insisting that the Church of England should actually become the money lenders. Shrug, I guess tempus fugit after all. Jan also had a joke about this idea as well.

However, underneath the inherent silliness is something much more welcome, a definite antidote to the increasingly shrill calls from the likes of Stella Creasey that payday lending must be abolished by legislative fiat. For what the Rev Welby is actually saying is that he wants to drive these lenders out of business by competing against them, not by hoodwinking credulous MPs into stealing away someone's livelihood. Welby is insisting that such short term and low value lending can be done at much lower prices than the current companies manage it. This would be to the benefit of the consumer, as competition always is, and this would thus be a good thing. And we around here do have a habit of welcoming goods things, whatever direction they arrive from.

So, after the sniggers have died away, full marks to Cantab.

Except for just one little detail: I'm entirely unconvinced that it will indeed be possible to offer such low value and short term loans at rates appreciably different from the current providers. It's absolutely possible to offer larger sums at lower rates: it's also entirely possible to offer longer terms at lower rates. But there's an inherent problem in small sums for short terms. There's some overhead to the making of any loan. Some irreducible minimum that it costs to make the decision to grant or not grant the facility. And the shorter the time period and the lower the sum then the more that minimum cost will be as a percentage. And, given the way that APR works, it becomes some vast percentage when a 1 week loan is calculated as if it is a series of 52 one week ones (which is pretty much what APR does).

I've seen a report that Goodwill (think charity shops) tried this in hte US and found that APr was well over 130% without even charging interest, let alone trying to make a profit. So I wish the CoE all the luck in trying to compete in this payday loans market. But I do think that they're not going to get very far. Simply because the costs of lending small sums for short time periods are inherently high.

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We don't want a financial transactions tax because it's an extremely bad idea

Written by Tim Worstall | Saturday 27 July 2013

The buffoons who are our elected politicians are calling again for a financial transactions tax. The only problem with having such an FTT being that it's an extremely bad idea.

In a report that calls for the Government to implement the Kay recommendations, MPs have called for the Government to consider imposing an FTT to help reduce high frequency trading. Professor Kay, whose report into short-termism in equity markets was published last year, did not contain any mention of the FTT. But Adrian Bailey, chairman of the Committee, said he had found support for the tax during evidence sessions. “The Government should assess the likely impact of the introduction of a Financial Transaction Tax and how the obstacles to its implementation can be overcome,” he said.

There's no particular problem with implementing an FTT. It's just that it's a very silly thing indeed to try and do. As the House of Lords Committee which looked at the same subject pointed out:

A  European tax on financial transactions could cost Britain’s economy up to 20 times the amount it raises, a committee of lawmakers said on Friday. Britain has said a transaction tax, dubbed a Tobin Tax after the U.S. economist who devised it in the 1970s, would only work globally and the EU plans are “deeply confused.” Britain is fiercely opposed to the proposed financial transaction tax (FTT), which the European Union said could raise 57 billion euros (49 billion pounds) a year if implemented across the bloc. “The FTT is likely to induce a loss in GDP between five and 20 times larger than the revenues raised from the tax,” according to an economic sub-committee of the House of Lords, the upper chamber of the parliament.

Perhaps part of the difference here is that I was asked to prepare evidence for the HoL report and did so, while the HoC one seems to have had no one who understood the EU's own report into said FTT. That EU report stating that by imposing an FTT the economy would be smaller than it otherwise would be and that the tax revenue losses from said smaller economy would be substantially larger than the direct revenues from the tax. The FTT is thus a method of reducing tax revenues. We even have a pair of Nobelists (Mirrlees and Diamond) insisting that transation taxes are in and of themselves a bad idea.

Or, as we might more cogently put it, the FTT a damn stupid idea that we really don't want to implement.

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Is the NHS really the kind of health service we want?

Written by Dr Eamonn Butler | Friday 26 July 2013

Half of Britain's family doctors, according to a survey this week, now believe that their patients should be charged to see them. Their workload, they complain, has become 'unmanageable', their waiting rooms clogged up by people who have very minor ailments and do not need to be there.

I write this from a car repair shop outside Cambridge. I had a problem with my car, so I called up yesterday and made an appointment, to suit my convenience, for 8am today. I rejected the offer of a courtesy car while mine was being looked at, but was invited instead to spend the intervening hour in their gleaming air-conditioned customer lounge and to help myself to coffee, tea, sandwiches, biscuits, fruit juice and lots more besides. So I have been reading the newspapers, watching the TV news, and I will shortly be sending this to the blog on the free customer wi-fi. Through the plate glass window I see the engineer plugging various computers onto my vehicle to find out exactly what is wrong. The fee for that hour of his time and all that customer service? £50 (including VAT). The difference between this and a doctor's waiting room could hardly be more stark. If I could pay a fee to get that kind of service from the NHS, I would be absolutely delighted.

Britain has a National Health Service that was constructed during the years of wartime austerity (which was real austerity, not the bogus 'austerity' we are told we are experiencing today), and it presumes that most of us are on the breadline. But there seems no shortage of people who, like me, are willing to pay £50 to sit in comfort while their car is fixed. Do we really think they would not pay £50 to get the health of their own body diagnosed? The first thing we need to do is to take the middle classes out of the free healthcare scam and focus our resources on people who genuinely can't afford a doctor.

As for them, just look round the world – there are innumerable ways of making sure that people who cannot afford the full cost of medical care still get it. In France you pay, but get a rebate if you are on low income – so you are aware of the cost, but do not suffer it. Other countries have insurance systems in which the state pays the premiums of the hardest-up. Britain's trouble is that nobody has the faintest clue how much medical care costs, so don't think about whether their sniffle is really worth the doctor's time and the taxpayers' cost.

I find myself visiting the doctor more, now that I have given up on the NHS and pay privately. Instead of fearing that I might be wasting the doctor's time on something minor, I know that the doctor is pleased to see me because I am a paying customer. It doesn't cost a huge amount, in fact – nothing like the £150 charge that the NHS doctors survey worryingly suggests. But like the car showroom, I get seen immediately in pleasant surroundings and get treated as a valued customer by someone who is not overloaded and stressed out. Isn't that the sort of health service we want?

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Holy Credit!

Written by Jan Boucek | Friday 26 July 2013

So Archbishop of Canterbury Justin Welby wants to make the Church of England’s property available for Credit Unions so they can wipe out those dastardly payday loan sharks. This is a brilliant idea with wide-ranging opportunities for both entrepreneurial clerics and banks.

Just consider the convenience for consumers of banking and praying at the same time. After the queue for communion, you simply shuffle over to the bank teller next to the altar to pick up your loan or maybe deposit whatever spare change you have after passing the collection box.

Meanwhile, over in the confessional, the priest can follow up an absolution prayer with a financial product pitch – “Have you considered insurance for seven years of drought?”

Recruitment of young folk into the priesthood has become a real problem for the Church but Credit Unions on site offer an added attraction in the area of branch security. Wearing body armour under cassocks, learning a martial art or designing bank vaults disguised as crypts will broaden the profession’s appeal.

Of course, established banks won’t be sitting still against this new competition on the High Street. Many branches surely have space available for any number of religious sects to set up shop.

What depositor with a bag full of cash could resist first lighting a candle in the hopes his deposits won’t attract the attentions of the taxman? Impatient couples could stop off at the on-site wedding chapel before opening a joint bank account.

Imam calling for midday prayers while you’re stuck in the queue behind the old lady counting out thousands of pennies? No problem – step aside to our prayer rug area and we’ll hold your place in the line.

And what customer wouldn’t appreciate an evangelical choir lifting the spirits before meeting  the bank manager about those persistent overdrafts?

Keep those ideas coming, Mr Welby!

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The unprecedented $60 trillion of costs of Arctic melting

Written by Tim Worstall | Friday 26 July 2013

Much ado about a new study published in Nature. Arctic melting could lead to methane emissions which would cost the world $60 trillion. This is an unprecedented danger say scientists. Sadly, whatever one thinks of the scinece in this, those damages aren't unprecedented at all. Indeed, they're already written into the costs which we use to worry about what to do over climate change.

But, they say, economists are missing the big picture. "Neither the World Economic Forum nor the International Monetary Fund currently recognise the economic danger of Arctic change. [They must] pay much more attention to this invisible time-bomb. The impacts of just one [giant "pulse" of methane] approaches the $70-tn value of the world economy in 2012", said Prof Gail Whiteman, at the Rotterdam School of Management and another author.

The problem with this assertion is that all of the standard estimations do indeed include damages like this. Let us take the Stern Review for example, that's the one that tends to be used as a benchmark (and is indeed the benchmark that these scientists have used). In that Stern Review, drawing from the estimates in the Special Report on Emissions Scenarios, the assumption is that the global economy will grow by some 5 to 11 times over the course of this coming century. Global GDP will be between $250 trillion and $550 trillion. Stern then says that the damages from climate change could be as much as 20% of this sum. That is, that GDP would have been in that range but will now be in the $200 to $400 trillion range. Note that that is his worst case argument.

And here we have an estimate that damages could be $60 trillion over a 50 years time period: say, $1 trillion a year with a bit of rounding. Or one half of one percent to one quarter of one percent of global GDP. We have already got this included in our top whack estimate of damages of 20% of future potential GDP.

All of which brings us to the real point at the heart of the entire climate change discussion. No, not whether it is happening or not: let's leave the range of possibility open from nothing is happening at all all the way through to the sort of disasters being predicted here. It is still true, wherever on that spectrum we are, that we want all humans over time to be just as rich as is possible. We are therefore trying to balance the costs of not doing something about climate change against the costs of trying to do something about climate change. And as these century long figures show there are significant costs to both, or at least potentially there are.

But we should be measuring the costs of doing something as against the loss in GDP which doing something will cause. Just as we should be measuring the costs of not doing anything against the cost that not doing anything will cause. It's worth trying to avoid such methane releases if the cost of doing so is less than the economic growth that will be foregone. Which is where throwing around numbers like $60 trillion becomes unfortunate. For it's a cost over many decades: $1 trillion a year is more reasonable to use. And compared to the benefits that economic growth is going to bring to our descendants that's however large it is in one manner, really rather a trivial figure.

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