The difference between causality and correlation is fairly important

We’ve a new report stating that obesity is making us all poorer:

Areas in England with the most overweight and obese people also have the lowest rates of productivity, according to research showing “obesity is an economic as well as a health timebomb”.

Conversely, places with the highest gross domestic product (GDP) per head have much lower proportions of citizens who are dangerously overweight, the analysis shows.

Well, yes. The report then goes on to suggest that if we reduced the obesity rates then GDP would be higher and we’d all be richer. It’s that second bit which isn’t obviously so.

There’s the usual mistake of course, obesity is seen as a cost to the NHS. As we’ve pointed out many a time before when we have a lifetime health care system it has to be lifetime health care costs which are used to calculate the costs of any particular disease, affliction or condition. And the obese do indeed die earlier (well, the morbidly obese, on average) and as it works out this reduces lifetime health care costs. As do drinkers and smokers. We all do gain - yes, despite current complaints - end of life health care from the NHS and it’s not obvious that those costs are greater for those who have over-indulged in any of the trio of booze, tabs and doughnuts. But that dying earlier reduces the number of years that standard health care costs have to be carried - overall shorter lifespans save the NHS money.

We’ve also a new and interesting mistake here.

Obesity tends to be associated with poverty in our society. That’s one measure of how rich it is, of course. Until perhaps a century ago only the rich could even afford to be fat. But we also tend to think that people are paid their marginal productivity. Which means that incomes are lower in areas with lower productivity. Also, lower incomes means people are poorer by that national comparison.

So, what we’ve really found here is that there’s a correlation between relative poverty and relative poverty. Lower GDP, relative poverty and diseases - or conditions - of poverty are correlated.

It’s, umm. something of a leap to then conclude the causality runs from the obesity to the relative poverty. Possibly even a vaulting over a chasm in the logic.

To be very polite about this let us say that we’re less than convinced about that final step there. For the conclusion is that if we were slimmer then we’d be richer. And, well, obesity rates are very much lower in very poor societies, so we’re really unconvinced that it does work that way.

It would have been much simpler to do this at the beginning

The latest demand about climate change:

Green taxes should be added to clothes, gadgets and red meat as part of the Government’s net zero plan, a new report from its former “nudge unit” said.

More than 70 per cent of people backed extending carbon levies to include clothing and electronics in a survey by the Behavioural Insight Team (BIT).

Well, yes, obviously. If we assume that CO2-e emissions cause problems then all CO2-e emissions should be treated in the same manner. Because all CO2-e emissions are the same thing causing the same problem.

Of course, we we don’t assume that CO2-e is a problem then we’ve not a problem to solve.

We also have a long report on what to do about this, The Stern Review. Which tells us what to do if we do make that assumption that CO2-e is a problem that must be dealt with. We do not have “green taxes” - another impost on whatever the environmentalists wish to mither about this week. We have the one tax on CO2-e and only CO2-e from whatever source. We have “a” carbon tax, not green taxes.

Thus fumes from fertilisers, cow burps, fossil fuel emissions, emissions from making cement, gadgets or clothes are all treated in the same manner - because it’s the CO2-e that has been identified as the problem.

We’re even told how much this should be. Some $80 per tonne CO2-e. UK emissions - yes including imports - are of the order of 500 million tonnes a year. That means $40 billion of tax or, in real money, perhaps £30 billion. We already pay emissions taxes of that amount and more, fuel duty.

There is nothing at all in climate change which says government should be larger. Only that a Pigou Tax is the correct response to the emissions which cause the problem - for those who believe there is a problem of course.

Once we understand the science here - and this is the economic science about the problem on that assumption there is a problem - then public policy becomes very simple.

Reduce fuel taxes so that emissions from fossil fuels are correctly taxed, then increase emissions taxes elsewhere in the economy so that those other emissions are correctly taxed. For we are already all paying the correct amount it’s just badly distributed.

One of the grand truths about climate change is that according to that economic science concerning climate change we’re already solving it. We already suffer the correct taxation to deal with it that is. We just do it very badly at present and should do it better.

It really would have been very much simpler if everyone had understood what Stern was actually saying those 17 years back and based public policy on what he did actually say. But, you know, politics and governance.

Welfare shouldn't be complicated

Every year, Parliament passes a bill called The Social Security Benefits Uprating Order. This bill is likely one of the most consequential acts of Parliament for millions of people on low and medium incomes across the country- but if you’d like to read it, you’ll have to sit down: like it is every year, the latest one is over fifty pages long.

The bill directs government departments to increase around 250 different benefit parameters: numbers like the Universal Credit child allowance or the Pension Credit Minimum Guarantee level. Each of these parameters is one element of our intricately-designed tax-benefit system, and the burden of this complexity falls directly on the poorest in society: either through the questions they are forced to answer to qualify for support, or in the now unimaginably complex task that financial planning becomes for them.

A counter-argument jumps up: but we need all these details to account for individuals’ complex needs. But this seems at odds with our attitude to the people we do know. Imagine your neighbour fell into a period of financial difficulty: how many questions would you need to ask them before you could say how much state support they ought to be getting? If it’d take any time less than 45 minutes: congratulations, you’re faster than the DWP.

Things don’t actually have to be like this. The number of calculations we need to force claimants and their benefit administrators to make is almost certainly far less than the hundreds we currently do. The nation didn’t take well to the notion of extra compulsory maths, deriding it as overly paternalistic: why force such a burden on welfare claimants?

Deeply woven into the current system are hundreds of mechanisms by which we treat some claimants differently than others: for example, whether a person’s financial difficulty began before Universal Credit’s introduction or after, or their hourly wage, might drastically change their entitlement. If benefits should be based on need or deservingness, what relevance is this? Of course, this isn't necessarily true of all the questions the DWP asks: disadvantages like disability are still important and should still entail higher support.

Moving welfare along the axis of simplicity but preserving its generosity shifts us toward programs that might look more like a negative income tax (NIT). This is a very broadly-defined concept with a simple proposition: income tax should start below zero, representing a transfer from the government to the taxpayer.

Governments have implemented NIT-style policies to varying degrees: refundable credits in the US can prompt a payment from the IRS to the taxpayer, but only for the slightly-poor and not the very-poor. (1)

Here’s an example: we could guarantee each adult £60 and each child £100 per week by replacing Universal Credit and phasing out a benefit at 35% for every marginal pound, without adding to the budget deficit. PolicyEngine estimates that this reform could give an extra £400 to the average household in the lowest income decile, and lift around 1.2 million children out of poverty. (2)

No model is certain, of course. This impact relies on the negative income tax payments reaching everyone, an assumption which is not unreasonable: programs which pay first and ask questions later have far higher take-up rates than those which ask first and pay later. (3) Child Benefit shows the sheer efficiency of the pay first, ask questions later (and don’t ask too many) approach to welfare, with the highest take-up rate of any benefit by far.

The notion of equal treatment is seen almost nowhere in the tax-benefit code, but this kind of reform would move us closer to treating low-income people more equally with each other. It does however leave untouched a different dividing line in our treatment of people: the inequality of work incentives between people on benefits and everyone else.

Negative income taxes still have the same problem as every other type of benefit that phases down to zero: beneficiaries are forced to pay far higher marginal tax rates than anyone else. People on Universal Credit pay an average of 56p back to the state for every marginal pound they earn, compared to the average of 35p for non-claimants. The phase-out in the above NIT reform is lower, but functionally does the same thing.

When it comes to work incentives, the negative income tax diverges from a policy often described in the same breath: a universal basic income, which provides an unconditional equal cash payment to every person. While a NIT and UBI might sound like the same thing, a UBI doesn’t include any kind of clawback, forcing policymakers to fund it from reforms to general taxation- reforms that would affect everyone, without separating into beneficiaries and non-beneficiaries. UBI doesn’t even have to directly tax labour: we could fund it with fees on carbon emissions or land rents.

This kind of radical egalitarianism necessitates equal treatment of an entire population, and only a few governments have had the courage to implement it: progressive havens like Idaho (4) and Alaska. These states combined the values of equality and fairness with its most practical implementation: if we share those values, so should we.

1. Refundable credits like the Earned Income Tax Credit and the Child Tax Credit only benefit filers with earnings.

2. Absolute poverty (under the government definition) is defined as living with income below 40% of the 2011 median household income, adjusted for inflation and before housing costs.

3. For example, Child Benefit’s pre-HITC takeup rate was around 96%. In the same year, means-tested benefits ranged between 55% and 88%.

4. The grocery tax credit is an unconditional cash payment with no income requirements, funded out of general tax revenues- the definition of a universal basic income.

We have beaten absolute poverty in the UK

We’re told that poverty is still among us:

“There is no primary poverty left in this country,” Margaret Thatcher told the Catholic Herald in 1978, five months before she became prime minister. “There may be poverty because people don’t know how to budget, don’t know how to spend their earnings” but such poverty is the product not of social policy but of “personality defect”. Almost two decades later, in her 1996 Nicholas Ridley Memorial Lecture, six years after she had been pushed out of No 10 by her own MPs, she insisted again that “poverty is not material but behavioural”.

In between those two speeches, during her 11 years in power, the reality of Thatcherite policies, of reducing the top rate of taxation while cutting benefits, of devastating manufacturing industry and destroying trade unions, led to a huge increase in both poverty and inequality though the 1980s.

This much as Barbara Castle said back in 1959. The destitution Labour was set up to alleviate had already gone by that point.

There is a Britain in which last year the income for the poorest fifth of the population fell by 3.8% while that of the richest fifth rose by 1.6%.

Well, yes, and using those same ONS numbers we get this:

Median disposable income for the poorest fifth of the population decreased by 3.8% to £14,500 in FYE 2022;

We can check that against global numbers. For a single person household that £14,500 puts one in the top 10% of global incomes. For a two adult one, top 17%. For two adults, two children (and it’s not really possible to be a larger household than that and have an income that low given the benefits system) it’s still true that 75% of the world is poorer.

Yes, those numbers are already adjusted for the different prices in different places, they’re at PPP exchange rates.

Poverty, as an absolute - and barring significant addiction or mental health problems - is something that just no longer exists in Britian.

We do have inequality, most certainly we do. We might have too much of that, or not enough, to taste. But actual poverty, in the sense of having nothing rather than just less than others, that’s gone. Probably worth starting all debates about poverty alleviation with that acceptance that there is no poverty left to alleviate. There’s just inequality, something we may or may not wish to deal with.

Rentiers are indeed a problem

Martin Wolf has a new theory out there:

Even as democratic capitalism was flourishing, the system was getting out of whack. “Rentier” capitalism, in which a small number of people extract more value from the economy than their contribution warrants, has been on the rise since the late 20th century, especially in Britain and the United States. The system is therefore not serving large parts of society, whose members have turned against it. The beneficiaries of this ferment are populists who claim to represent “the people”, but serve them even worse than do the elites who run democratic capitalism.

We’re not sure we do agree with that although we certainly agree that it’s a possibility. Rentiers, rentierism, can get out of hand and if they - it - do then the way can indeed be cleared for something and someone vastly worse. A rational being would prefer some amount of rentiers making hay to any form of democratic socialism for example.

But assume that it is true. What, then, should be done about it?

At which point, a slightly twisted view of the world. Twisted by the usual conventions that is, even if it is in fact the correct, non-astigmatic, manner of looking at things.

Cui Bono? Who benefits from Walmart, or Amazon? Sure, we can call - and many do - the Walton family who inherited 50% of the stock, or Jeff Bezos who enjoys his own shareholding, rentiers. But who in fact benefits from the organisations themselves? For theory we’ve W. Nordhaus on Schumpeterian profits. The entrepreneurs gain perhaps 3% of the total value of their efforts. Near all the rest flows to the consumer.

We can also be more specific. As Jason Furman has pointed out (old figures, of their time) the Walton shareholding in Walmart is perhaps $100 billion of capital. The annual benefit to US consumers of the existence of Walmart is $263 billion. Bezos has been worth $200 billion and now perhaps $120 billion from his Amazon stock. The effect of Amazon more broadly is “a decrease in pass-through inflation.” The other way to put that is that the entire retail structure of the country has become more efficient, thus saving consumers money. Estimates run at around 0.1 to 0.2% per annum off the general inflation rate for a couple of decades. Call that 2% off consumer pricing in those past couple of decades then. Or, in the US economy of $20 odd trillion, $400 billion a year.

As we know from Saez and Zucman we can capitalise such income streams by applying the relevant discount rate. That is how they estimate the wealth distribution after all. The existence of Walmart creates around $5 trillion of wealth for US consumers, of Amazon perhaps $8 trillion.

At which point it’s possible to ask who are the rentiers here? By value allocation it’s not entirely obvious that it’s the Waltons or Bezos. Actually, it looks like it’s consumers who are making out like bandits.

The reason the value gets allocated that way is because both Walmart and Amazon were competitive irruptions into the marketplace, forcing every other capitalist - rentier - to compete with them. It’s the competition that leads to the consumer benefit - the consumer benefit being the thing we’re after in the first place.

At which point the policy to follow to attain our goal is obvious. Maintain the free part of free markets - the ability to enter the marketplace - and watch as the rest of the system does the job for us. As long as people compete to become rentiers then the system works. That very competition to become so being what limits the rent that can then be extracted thereby allocating near all of it to us out here.

Despite what some might think we do not believe that free markets are the answer to everything. They are though the answer to capitalism.

Productivity is pretty much everything

As Paul Krugman has been known to remark, productivity isn’t everything but in the long run it’s pretty much everything. The average productivity of labour in an economy is the determinant of average wages in that economy:

“Wages are determined in a national labor market”…(…)…”Finally, and most importantly, it is not obvious to non-economists that wages are endogenous. Someone like Goldsmith looks at Vietnam and asks, "what would happen if people who work for such low wages manage to achieve Western productivity?" The economist's answer is, "if they achieve Western productivity, they will be paid Western wages" -- as has in fact happened in Japan.”

The importance of all of this on two stories in the newspapers yesterday:

Tens of billions of pounds in additional funding will be required to keep public services running this year because of a collapse in productivity that experts blamed on weak management and working from home.

Public sector productivity fell 1.3pc in the three months to September compared with the previous quarter, according to the Office for National Statistics (ONS). This compares with a 0.1pc increase in output per hour across the economy over the same period.

It means productivity in the public sector is 7.4pc below pre-pandemic levels, compared with a 1.6pc increase in the equivalent economy-wide measure.

Leave aside those costs required to gain a static level of public services in the face of such a fall in productivity. That is - also - a fall in average productivity across the entire economy. Thus that lowers wages across the entire economy. For wages are determined in a national labour market, the determining being done by the average level of productivity in that national market.

This is also true at the other end of the global economy:

People focused on Davos may not have heard about the success of organisations like Fundación Paraguaya, which is working with families to help end poverty, or Maono Africa, which has been educating women and girls in Kenya. These innovative and critical perspectives, which hold the key to progress, weren’t present because localisation wasn’t on the agenda at Davos.

Grassroots leaders like myself know that the world’s “big problems” are only fixable when we tackle them from a local perspective – yet community-based organisations are vastly underfunded, and need support. If the WEF wants to see real change, it must put the work of community leaders at its centre, and those in attendance must be willing to shift funds and decision-making power directly to the people leading this critical work.

Ending poverty works the same way. Increasing the productivity within that Kenyan economy is what will reduce poverty in that Kenyan economy. For it is that average labour productivity within Kenya which determines the average wage rate in Kenya.

So, yes, it’s not people blathering at Davos which matters, it’s that micro-scale activity within the Kenyan economy which does. Every installation of a sewing machine instead of the hand wielded needle and thread, every replacement of a shovel with a JCB, every killing off of unproductive bureaucracy, each and every single such action works to raise wages in Kenya.

Just as every movement to a more productive state workforce in Britain will raise British wages. Simply because that’s how the world works.

Productivity indeed isn’t everything but in the long run of determining the average standard of living it’s pretty much everything.

Which does leave us with the question of how do we increase the productivity of the state workforce here in Britain? We’d open the bidding with fire half of them and see what happens - but that is just us being somewhere between jocular and provocative. We’re entirely open to other solutions but we do insist that the problem is as described. British wages are low because too much of British labour is employed in low productivity endeavours. That’s just a truth and the one to be grappled with.

Book Review - In Defence of Capitalism

“One of the most important books in decades defending capitalism… Adam Smith would have been impressed - and proud.” - Steve Forbes

A second recession within 20 years, rampant inflation, increasing dependency on food banks.  You can understand why Anti-Capitalist ideas are making a resurgence into the mainstream. But is capitalism to blame for all these problems? Would outcomes be better under communism, or other non-capitalist systems Dr Rainer Zitelmann thinks not.

The outcomes due to capitalism have consistently been better than those of opposing economic ideologies and in his new book ‘In Defence of Capitalism,’ Dr Rainer Zitelmann explains how common misconceptions provide people with a misconstrued view of Capitalism.

Zitelmann works through these arguments explaining where the beliefs have originated from. Before then explaining how this is not the case, or at the least not a fault of capitalism. He starts with the idea that capitalism is responsible for hunger and poverty. While poverty and hunger do exist in capitalist societies, the idea that it is capitalism's fault, or that it would be better under different systems is incorrect. As the World Bank just pointed out, China’s free market reforms helped raise 800 million people out of poverty.

Carrying on from this he examines one of the most egregious examples, the practice of comparing the current economic systems to purely theoretical utopias, whether pro free market or anti-capitalist this is simply ridiculous. Surely it makes sense to compare apples to apples? Even then, comparing ideological hypotheticals serves little purpose due to the pure number of different variations, and the nature of them being, well, hypothetical. 

The reality, which the author goes to great lengths to demonstrate, is that no matter the variation of communism or socialism, nations driven by ideologies dedicated to abolishing private property have and will continue to fail.

The important distinction Zitelmann claims is that ‘Capitalism is not a system devised by intellectuals, it is an economic order that has evolved organically’. That is not to say the current system is perfect, but it is no accident we are where we are now. And the journey is not over, capitalism will continue to evolve and adapt.

To end, the book shares and analyses the most comprehensive survey about people's perceptions of capitalism across both developed and developing nations. Confirming that the beliefs addressed throughout the book are not fringe ideas, but have altered the perception of capitalism on a mainstream level, to the point where only 14% of people in the UK believe that ‘Capitalism has improved conditions for ordinary people. 

This book is, as the title suggests, a comprehensive defence of capitalism. And no matter what side of the isle one finds themselves on, it provides useful insight into historical facts on issues which many have assumed to be foregone conclusions. Making it an important and interesting book well worth the read.

We really do hope that policy isn't being made on this basis

There is that idea that government includes all the really bright people - those Rolls Royce minds - and therefore we’d be better off leaving all the difficult stuff to them. Now, we don’t know whether this is in fact government making this mistake but mistake it is:

China dominates the global semiconductor market but officials have been increasingly concerned about the national security implications of this.

No, not really. In fact, not actually at all.

Taiwanese companies account for 50% of the semiconductor world market.

Others put it closer to two-thirds, not one-half.

Now yes, we are all supposed to agree with that One China idea (what is it, four or five systems now? Tibet, Hong Kong, Macau and Taiwan all having differences) but let’s keep that where it belongs, in that diplomatic lip service. In economic terms Taiwan - and therefore the nexus of the global semiconductor industry - is not in that part of China run by the CCP. Which is presumably what people might worry about.

The importance of this?

Britain to challenge China with £1bn subsidies for computer chip makers

The decision comes amid a growing unease over Britain’s reliance on Chinese made components

Please, please, do tell us that we’re not about to spend £1 billion because the Foreign Office wishes to be polite to Beijing - a perfectly acceptable thing to do of course - and we’ve all forgotten that this really is, only, the Foreign Office being polite to Beijing.

Energy starts at home

At the end of last summer, with war in Ukraine still raging, the talk was of eye-watering energy price surges and power cuts, particularly in Germany, with its heavy dependence on Russian oil and gas. But now, Germany aims to reduce its Russian energy usage to almost nothing by year-end, delaying its closure of nuclear plants, cutting its energy usage, even reopening coal-fired power stations.

Meanwhile, the cross-border supply and storage of gas has been improved. The US now supplies nearly a third of Europe’s Liquid Natural Gas (LNG), and Europe has bought up supplies from round the globe, shipping them to new floating terminals in the North Sea. Now the gas price is down to pre-war levels.

A lot of this, however, is just a quick, emergency fix. Ukraine tells us the need to have a robust energy policy, and a flexible one, able to withstand interruptions in different energy sources. And it has taught us the need for investment in that.

But energy investment is a long-horizon activity. It can take 7-10 years to get your money back. So, investors need policy certainty — just the opposite of what our politicians are providing. There are frequent and unpredictable changes in taxation, like ‘windfall taxes’, for example. And equally unpredictable changes in regulation, such as price caps.

Then there is the general tendency of politicians to see one fad after another as our single energy solution. From coal we went to postwar ‘atomic power’, then cheap oil from the Middle East, then, after OPEC, North Sea gas (the proceeds of which we used to expand welfare dependency), then wind and solar, then fracking, then hydrogen, batteries and now fusion. Each new energy minister (and there have been a lot of them) seems to have their own fad. How is anyone to invest long-term in such a fickle policy environment?

Plainly there is a huge need for more electricity generation. Think of all the power needed by millions of electric vehicles, including buses, trains and even planes. We may even be manufacturing more as we wean ourselves off uncertain China. And we need more interconnectivity too. We need to route our energy around unknowable future events like wars, accidents, and policy stupidities. France might even need UK supply when its nuclear reactors need replacing soon.

To generate on that scale, we need investment, which means policy certainty. No stop-start tax, price and regulatory changes. And to make that generation robust against changing events, we need to have a wide mix of energy sources. Not a dash to one source, then another. Not just renewables — wind power, for example, is volatile and so needs back-up from other sources — but gas, nuclear and fracking as well, leaving open the option of new technologies if they work out, such as small-scale nuclear and fusion power. And a mix of competitive suppliers too — using nuclear technologies from the US, France and Japan, for example.

And new generation will need greater vision on land-use planning. Large-scale generation projects provoke large-scale NIMBYism. But they are appropriately national rather than local decisions. They are about national energy security, which must take priority. And if that means compensating unhappy locals, we should. Huge discounts on their future energy bills, perhaps? The prospect of energy diversity and security must surely be worth that.

So here is - an attempt at least - at sorting out the NHS

This may work, it may not, but it is at least an attempt to sort out the actual problem:

Robots will be deployed to help clear NHS waiting lists and decide who gets seen first.

Pilot schemes have begun using automated calls to assess patients waiting for operations and prioritise their urgency.

One major company said the NHS is now looking to use automatisation in about 100 areas, including helping to clear backlogs and speed up the handling of referrals.

As we’ve pointed out before a standard claim about the NHS is that it has a different inflation rate than the rest of the country - than the rest of the world perhaps. This is because the NHS is less good at increasing productivity than the rest of the country - the world perhaps.

As we’ve also pointed out before the solution to this is to apply extra effort to improving productivity in the NHS. As is well known it is competition and the markets which generate the competition which improve productivity. So, more markets and competition to make the NHS better.

The act, rather than the process, is that very automation above. Yes, services find it much more difficult to increase productivity than manufactures (thank you, Dr. Baumol). The answer is, where possible, to turn a service into a manufacture at which point productivity improvement becomes easier. Robots and ‘bots (the latter usually referring to software, the former to physical machines) are one of those acts of automation. As was - in our oft-used example - aspirin, which automated the previously used comely maiden wiping fevered brows with a cool damp cloth.

So, full marks to the act being attempted here. To increase NHS productivity by automating more of it. We do though need to still keep ahold of the other point. That the system which increases the number of such attempted acts is markets and competition. So, we need more of those to encourage more such acts.

There is another issue of course. Which is that it’s only competition - attempting the same task in different ways at the same time - which allows us to work out which method works better. We automate one part of the NHS in one particular manner, measure that against the parts unreformed and then decide whether it’s a good idea or not. For experimentation is competition, isn’t it?