We've actually tried negative income taxes, and they seem to work

The latest issue of Chicago magazine has a great piece on the 1970s experiments with the Negative Income Tax (NIT) including in the deprived city of Gary, Indiana (famous for being the birthplace of the Jacksons). Inspired by Milton Friedman, and in an effort to reduce time, effort and effort spent administering welfare as well as stigma in receiving it, some of the poorest residents of Gary and four other poor areas received cash in randomised controlled experiments.

A lot of research was done into the treatment groups in Gary and across the other NIT experiments.

One study found that kids born to mothers in the treatment group had birth weights 0.3-1.2lb higher. Another found significant and substantial improvements in reading scores for children in treated families. And what's more, kids whose families had been in the programme for a number of years performed significantly better than those in it for a shorter time. School performance also increased significantly across a wide variety of metrics for early-grade students in a rural experiment in North Carolina, although the effect did not appear in the other major experiment, in rural Iowa.

It's not clear exactly where this effect came from, but the most plausible source is probably better nutrition and spending the extra money on housing in better areas. Most of the evidence suggests that recipients did not spend their windfall on expensive consumption goods.

There were no overall robust effects on marital stability, but this was misreported, and the mistaken belief that the NIT had led to black families breaking up was a significant factor in killing the proposal as a political possibility under Richard Nixon.

However, as well as the effects seen, the experiments seemed to find that the income effect—having more money overall—outweighed the substitution effect—lower and more predictable effective marginal tax rates making it more attractive to work—especially when it came to women. A glance at the table below makes this clear.

But it's possible to conclude that the fall in the amount of labour those getting the NIT supply (something like 5% for the poor groups studied, and around 2% estimated for the population as a whole) is quite small, and within the bounds of what we'd be willing to accept to substantially reduce poverty.

What's more, there are countervailing factors. One issue is the level of the guaranteed income. Some of the families received were guaranteed an income 150% of the poverty line. With a benefit level closer to the existing system, merely structured more clearly and predictably, we might expect a weaker or even positive response (although we alleviate less poverty).

A second issue is the long-term response. If the negative income can counteract large environmental problems, allowing families to move away from pollution and feed their kids better and achieve more in school, we might see these people enjoy improved long-term life outcomes. Even looking at things from a narrow labour supply perspective, we know that more educated and more intelligent people supply more labour over their lives, so the long-term effect may be neutral.

(Tables sourced from Widerquist (2005))

Foundations of a Free Society wins 2014 Sir Antony Fisher International Memorial Award

I am quite chuffed. My short book Foundations of a Free Society has just won the 2014 Sir Antony Fisher International Memorial Award. Named after the late business and think-tank entrepreneur, goes annually to the think-tank that publishes the study that has made the greatest understanding to public understanding of the free society. That means the $10,000 prize goes to our good friends at the Institute of Economic Affairs, who published it, rather than to the author (sob!), but all power to them. The book was only published last November but has already gone into nine translations plus one overseas English edition.

Previous winners have included the bodies that published such books as How China Became Capitalist, by the Nobel economist Ronald Coase, and Prof James Tooley's hugely influential book about private-enterprise education in poor countries, The Beautiful Tree. So I am in excellent company.

It is a fine example of what can be done when think-tanks collaborate, each doing what they do best in a productive partnership. And I will be there in New York next week, collecting the silverware along with my friends and colleagues from the IEA.

Foundations of a Free Society is designed to explain what a free society is, for people who do not live in one (which is most of the planet, really) and cannot understand how a free society can be made to work. It is written in very straightforward, non-academic language, with no big footnotes and references and all that jazz – the sort of stuff that even a politician could understand.

It talks about rights and freedom and representative government, and toleration and justice and free speech and all the other principles of social and economic freedom. And it explains how and why a free society can run itself, without needing top-down control from some strong, dictatorial government. I hope therefore that it will help get these principles lodged in the mind of the upcoming generation, and give them the confidence to build genuinely free societies in their own countries around the planet.

Download a free copy of Foundations of a Free Society here. 

Yes, of course Mariana Mazzucato is wrong, why do you ask?

Mariana Mazzucato is on a mission to persuade us all that as government provides all the lovely new technology and shiny shiny gadgetry we so enjoy then therefore we should all be coughing up a fee to said government for said shiny tech. There's a number of problems with this idea: one being the boring detail that government hasn't in fact been the source of all of that lovely research into tech:

I don't know about the CADC, but Tim Jackson's excellent book "Inside Intel" is very clear that the 4004 was a joint Intel-Busicom innovation, DARPA wasn't anywhere to be seen, TI's TMS 1000 was similarly an internal evolutionary development targeted at a range of industry products.

Looking at a preview of Mazzucato's book via Amazon, it seems that her claims about state money being behind the microprocessor are because the US government funded the SEMATECH semiconductor technology consortium with $100 million per year. Note that SEMATECH was founded in 1986 by which point we already had the early 68000 microprocessors, and the first ARM designs (from the UK!) appeared in 1985. Both of these were recognisable predecessors of the various CPUs that have appeared in the iPhone - indeed up to the late iPhone 4 models they used an ARM design.

However, there's two logical errors with her claim which are much more important than the technical details of what she's claiming.

The first is that she doesn't seem to understand the economics of government spending on research very well. There's certain things that the markets, entirely unadorned, don't do very well. While much too much of this is made in general it's at least arguable that the provision of the public good of basic research is one of these things. And given that one of the reasons we have government in the first place is to provide those things, like public goods, that markets don't deal with well then her argument falls into something of a trap. For she's arguing that government should get a slice of the returns (through ownership of patents, of shares in companies that use government funded research) from the provision of that research.

But why? The very idea of government doing this work is that without government intervention we'll not get this public good. We pay our taxes, government provides the public good and we're done. There's nothing extra that should be done about it: assuming that government has done the research, the research is indeed valuable, we've now got here an example of government doing what it has already been paid to do. Hurrah, celebrations and bring out the marching bands etc. There is no logic at all to the idea that government should get two bites of the same cherry.

The second logical problem is that she's arguing that (and this is the real point of her work) the EU research budgets should end up owning a chunk of whatever it is that turns up of value from EU funded research. There must be commercial arrangements for Brussels to recoup some of the profits from the use of the results. And her clinching argument is that Darpa, the US military research budget, produces huge value from the research that it funds. Therefore we should do as they do.

The problem with this is that Darpa deliberately doesn't try to retain an ownership interest in technology derived from research that it funds. On the grounds that it just wants to produce the public goods of the results of that research and when it's done that its job is done. And it's also a great deal easier and more productive to give scientists grants to do research than it is to have arguments with them over ownership, in advance of any actual findings, of whatever the results might be.

That is, we're being advised to a) do as Darpa and b) not do as Darpa in the same sentence.

It's nonsense sadly, but influential nonsense.

Objectivism and modern society

Ayn Rand’s Atlas Shrugged is polled to be the second most influential book in Americans' lives, coming in second only to the Bible. Whether this statistic is skewed or not, there is no doubt that Rand’s longest work has had a lasting impact on the hearts and minds of its readers since its publication in 1957. It may be too soon to know if it stands the test of time, but it has certainly persevered with power and passion. It’s hard to understand how Atlas Shrugged has remained so popular while the views of its author remain so controversial. Forget the left-wing masses—many self-proclaimed libertarians avoid being associated with her last name. In most circles (even sympathetic ones), the Randian badge is not worn openly.

Furthermore, she is consistently attacked by critics who paint her philosophy of objectivism as radical, rudely selfish and dangerous to modern society. When most people today—even on the right—recognise the need for some form of welfare or safety net, how can one include Rand’s voice in modern discourse?

At the ASI’s annual Ayn Rand Lecture on Monday night, guest speaker David Sokol addressed an audience of almost 300 attendees and reminded all of them why Atlas Shrugged transcends the criticisms and attacks on objectivism.

Unlike most philosophers and economists, Rand was able to connect philosophy and fiction in a way that inspired people to observe and revere the power of individualism. As Sokol pointed out, the right to have hope for yourself and whatever you choose to build is going to win against any promise a government can make.

Even in the 1950’s, Rand could see what direction governments was heading—that entrapments were disguised as promises, as governments increasingly encroached on individual's rights and property:

(Bureaucrat) Floyd Ferris:"You honest men are such a problem and such a headache. But we knew you'd slip sooner or later . . . [and break one of our regulations] . . . this is just what we wanted."

Rearden: "You seem to be pleased about it."

Ferris: "Don't I have good reason to be?"

Rearden: "But, after all, I did break one of your laws."

Ferris: "Well, what do you think they're there for?"

Ferris: "Did you really think that we want those laws to be observed? We want them broken.”

Today, some of the world’s most important leaders are looking to snare businesses, paint them as the enemy, and project the idea that the state is responsible for the success of business, job growth, and any individual achievement. It's an uncomfortable and deeply flawed narrative—and fortunately, not a particularly successful one. Regardless of bureaucratic narrative, Atlas Shrugged continues to inspire individuals in a way that collectivist approaches can't come close to; as such, Rand and her philosophy have secured their place in modern society.

To see photos of the ASI's Ayn Rand Lecture, click here.

Gordon Tullock: a great economist with no degree in economics

It is sad to report the death of Gordon Tullock. He was a friend, likeable and respected as a great economist – even though he had no degree in economics.He came, rather, from a public administration background, which was why he was the perfect partner to co-author The Calculus of Consent (1962) with James M Buchanan. The book was a counterblast to the 'welfare economics' of the day, which saw market failure and prescribed cost-benefit analysis and government intervention. But the book showed, comprehensively and clinically, how there was  government failure too. Politicians and officials are not angels, and their decisions are motivated by their own vested interests. Elections too are not a measure of 'the public interest' but a contest between competing and conflicting interests, which no amount of cost benefit analysis can resolve. The book became the foundation for what was to be an entire branch of economics – or perhaps political science – called Public Choice. The public choice economists, applied the tools of economics – the science of choice – to the democratic decision process. They found that the behaviour of voters, politicians and bureaucrats in the political market place is little different from the behaviour of buyers and sellers in economic markets. They too are self-interested and largely motivated by maximising their own 'utility', rather than that of 'the public'.

Following this approach, Tullock, Buchanan and fellow thinkers in the 'Virginia School', which focused on real world political institutions, realised that democratic processes were too often a very messy, exploitative and irrational way to make choices. They concluded that we should not be dewy-eyed about government decision making, and that we should limit it only to the things that are both crucial to do and simply cannot be done any other way.

Buchanan, in particular, emphasised the need for constitutional restraints so as to curb the exploitation of minorities by majorities, or of the silent majority by activist interest groups. On that front, Tullock will be particularly remembered for his delineation of the concept of Rent Seeking. The concept, and even the term, predated that work, but his contribution was to show how the cost of lobbying for government perks and privileges was economically inefficient and politically corrupt. He observed – the 'Tullock Paradox' – that the cost of rent seeking was often very low in proportion to the potential payoffs. A little lobbying can win potentially massive privileges (such as 'quality' regulation that effectively keeps out the competition). So it is no surprise that the lobbying industry has grown so large. And the more that government's range, power and tax take expands, the larger are the potential gains.

Many of Tullock's friends and colleagues were disappointed that he did not share in James M Buchanan's 1986 Nobel Prize. He never complained about it; and he will still be remembered with respect and affection.

For more on the Public Choice School, see Eamonn Butler's Public Choice – A Primer

Why not let rich people fund drug development directly?

That is, why not let ill rich people fund directly the research into a treatment that might cure them? That's the premise of this fascinating plutocratic proposal. That piece is very long, very detailed and walks you through almost all aspects of what is being offered. The essential idea is that, especially with cancers, there's a lot of weird ones that affect very few people. But there's quite a lot of rich people about and there's enough of them that, statistically, at least a few, a handful, of such rich people will get each and every one of those weird cancers.

This helps us to solve a certain problem that we've got with funding research into disease cures. We should, obviously, as a society be working on the low hanging fruit. A cure for something that kills 20,000 out of 100,000 people is worth a very great deal more in terms of human utility than a cure for something that kills 5 out of 100,000 people is. Tax funding of such research should therefore, again obviously, be concentrated on trying to find the cures for those widely suffered from diseases, not the weird and rare ones.

However, when we move from societal benefit to private benefit the numbers rather change. Someone suffering from one of those weird cancers is very interested indeed in a cure for that weird cancer. And some of those very interested people will be rich enough to fund the next step in the research. The step being talked about here is the movement of a likely looking treatment out of the lab and into Phase I clinical trials.

Those Phase I trials are where the first 10 or 50 people get given the treatment to see what it actually does to human beings. And there's a number of problems at this point. Neither tax money nor standard pharma investment cash is going to be very interested. One on the grounds that societal benefit will be greater with efforts made elsewhere, the other on the grounds that the final market simply isn't large enough to make it worthwhile. But of course rich people dying of the weird cancer face a different calculus.

The proposal is, at its simplest, just to allow said rich and ill people to pay for the Phase I trials (or some portion of them) in return for a guaranteed place on that very trial. They get this treatment that may cure them, 9 to 49 people get that same treatment without having had to pay anything and we all get the benefit of the advance in human knowledge.

Predictably this will cause howls of outrage in certain quarters. But we think that it's a fascinating idea: at the very least it's something that should be widely discussed and also in detail. No one is claiming that this is a perfect and final plan. Only that it's a very interesting one.

If we can harness the desire of rich people not to die to our goal of treating non-rich people dying of the same diseases then why the heck not?

Guy Herbert: The Human Rights Act as a constitution of liberty

Guy Herbert, best known as the general secretary of NO2ID but writing (and originally, speaking in a lecture at the ASI) in a personal capacity, defends the Human Rights act as necessary as a bulwark against the state when so many of the traditional defences have been eroded.

I am here to defend the Human Rights Act. It is not an idealistic defence but a pragmatic defence, rooted in historical context. Should classical liberals support the Human Rights Act against repeal? Do we need it? My answer is yes.

Our reactions to phrases become readily conditioned. And so it has been with “human rights”. Let us remember for a moment that the full title of the agreement that is under siege here is the Convention for the Protection of Human Rights and Fundamental Freedoms. If it were called the Fundamental Freedoms Act would it be as easy to undermine?

Sad to say human rights do have a bad name, and they have that bad name for good reasons. Their strongest proponents often do the most harm to their reputation – not because of the legal content of what they say, but of their approach to the law.

Read the whole thing.

Free banking in 19th century Switzerland

RePEc is a wonderful service, provided like the fantastically useful FRED by the Federal Reserve Bank of St. Louis. It has feeds on twitter and via RSS, which are one of the best ways of keeping up with new research papers on economics, provided as full pdf files—all for free. Occasionally, their feeds deliver older papers, which have presumably been scanned and indexed online in the database for the first time. A recent example was "The Competitive Issue of Paper Money in Switzerland After the Liberal Revolutions in the 19th Century" by Ernst Juerg Weber, an economist who was then, in 1990, and is still now, working at the University of Western Australia. I had never heard of him but his papers all look extremely interesting. This one is no exception, and it tells of how banking was completely deregulated during the early 19th century in Switzerland, and how it worked extremely successfully:

The main finding of this paper is that competition provided a stable monetary system in Switzerland in which the purchasing power of bank notes equaled that of specie and only one bank failed. The Swiss banks did not over issue bank notes because there was no demand for depreciating notes in the competitive Swiss monetary system. Each bank faced a real demand for bank notes that depended on the usefulness of those notes in commer­cial transactions. And the marginal revenue of inflating was negative for each bank because depreciating notes impose information costs on their users and people could easily substitute notes. In contrast, modern central banks can inflate at a profit because (i) they have the exclusive right to issue currency and (ii) currency substitution is limited by legal tender laws and -if necessary -by exchange controls. The Swiss monetary system was also stable in the sense that rising costs prevented a central-bank-like monopoly by a single issuer.

Liberals won a short civil war in 1848 then, in control of the federal government, removed restrictions on the free movement of goods, capital and people between cantons. This included allowing private banks to issue the newly-unified currency, the Swiss Franc.

There were no legal tender laws or exchange controls, and by 1880 there was one note issuing bank per 80,000 people, or 36 in total. Even though cantonal banks had regulatory and tax advantages, commercial note-issuing banks were able to outcompete them

Banks worked like any other business, with free entry into the note issuing business determined by whether they could offer notes that people found useful in transactions. Savings banks stayed out of the note business because they could not profit from issuing them.

However during the 1860s and 1870s more the democratic factions were in the ascendancy and started rolling bank liberal provisions, for example setting up subsidised and guaranteed cantonal note-issuing banks and heavily regulating note issue. By 1881 the Swiss free banking era was over despite its success.

In general free banking is a strange issue, because it seems like advocates have done a huge amount of work showing its successes and highlighting the failures of alternative systems. But opponents have mostly ignored all of this and seemingly work on entirely unchallenged views of one free banking system (the USA 1837-1862), acquired apparently by osmosis. If free banking wouldn't work in the modern era, then opponents need to do a lot more to explain why.

This is a case of too little capitalism, not too much

The latest outrage that the Guardian tells us we should all be upset about is how the poor villagers of Nejapa, in El Salvador, get done over by the greedy capitalists taking all the water: Water everywhere for profit in Nejapa, but few drops for local people to drink While big companies make millions from El Salvador’s water-rich Nejapa municipality, locals have little or no access to water Hmm, gosh, that's bad. There is one very interesting little line in the piece though: Najarro says she pays $7 a month (£4.38; almost 10% of her salary) for municipal water, even though her taps often run dry and the water that runs from them may not be safe to drink. It's the local council that she gets her water through? And a quick look around tells me that pretty much all of the country gets its water through the government. And as Wikipedia itself says:

Tariffs and cost recovery ANDA tariffs ANDA tariffs average US$ 0.30/m³ and are below levels found in many other Latin American countries. Furthermore, ANDA tariffs are not socially equitable since the subsidies implicit in the low tariffs predominantly benefit the non-poor. First, users without access to the network, which are usually the poorest, do not receive the consumption subsidy. Second, users served by other providers than ANDA do not receive a subsidy for consumption. Third, among users that have ANDA service, the poor receive fewer subsidies than the non-poor as a consequence of the tariff structure. Tariffs are for both water and sewer services. As a result, there is a cross-subsidy from users without sewer connection to those with a sewer connection who are usually better off. For political reasons, adjustments of ANDA water tariffs have been infrequent. Between 1994 and 2006 ANDA tariffs were only adjusted twice, in 1994 and 2001. The inflation-adjusted tariff, however, barely changed. Tariffs by other service providers Tariffs paid by water users in rural areas do recover financial operating costs, since no direct subsidies are available. They are often much higher than tariffs paid by ANDA customers. Some rural water users in pumped systems receive a subsidy through the Fondo de Inversión Nacional en Electricidad y Telefonía (FINET), which subsidizes electricity tariffs. Cost recovery of ANDA The financial situation of service providers in 2006 did not provide any more for self-financing of investments. ANDA's working ratio was close to 1, indicating that the company barely covers its operating and routine maintenance costs. The reason for the reduced self-financing capacity is a significant increase in the unit costs of ANDA from US$0.21/m³ in 1994 to US$0.46/m³ in 2001, and US$0.63/m³ in 2004. The reason for the important increase of the unit cost in 2004 is not clear, but it could be due to the inauguration of the energy-intensive Río Lempa system that pumps water from the Rio Lempa to San Salvador in that year.

So, the government charges very little for water but this doesn't help the poorest as they're not even on the water system. And so little is charged for water that they're not able to actually build out the water system simply because they've not the money to do so. And this might also have an effect upon how much water there is to go around:

It is estimated that 90 percent of the surface water bodies are contaminated. Nearly all municipal wastewater (98 percent) and 90 percent of industrial wastewater is discharged to rivers and creeks without any treatment.

They "treat" sewage by dumping it in the nearest river. This is not a problem of excessive capitalism: this is a problem of too little capitalism. Recall what happened in our own water systems, here in Dear Old Blighty, when the nationalised water companies were sold off. Investment went up, water quality went up, environmental degradation went down. It's entirely true that in theory a government could, possibly, determine the optimal investment levels in a natural monopoly like water and sewage services. And that there's an argument why government should do so. Actual experience though seems to show that governments tend to allocate less than that optimal level. Which is why privatised systems almost always show a rise in the level of investment. Too little capitalism here, not too much.

Do child benefits benefit society?

Child benefits are not simply philanthropic; they should motivate the parenthood society needs, notably a healthy birthrate for a population aging fast and parents bringing up contributors to society.  Currently 7.9M households receive child benefits, and there are, or were at the last count, 13.7M children qualifying.  That’s about £12.6bn child benefits in total  in total, disregarding those earning over £50, 000 who no longer qualify but still have to fill in all the HMRC forms just the same. Of course, you can also get up to £122.50 p.w. for one child, or £210 p.w. for more, to cover some child care costs for the better off.  So you get £1,066 for being a parent at home looking after the kid but six times as much if you go out and abandon it.  Not much of an incentive for the kind of parenting the country needs.

And if you are really bad parents, which probably also means parents in poverty, the State takes the children away.  “Looked after children” is the new term.  The numbers of children looked after is about 92,000 in England and growing, probably because of the squeeze, since 2008, on low income households.  The cost per looked after child is about £50,000 p.a.  It would be cheaper to send them to Eton – about £30,000 p.a.  The cost of looked after children does not include their disproportionate poor performance in school, absenteeism, low incomes as adults and likelihood of occupying our criminal justice system.

Most people recognise that this is a vicious circle but not only has no government addressed the problem but it seems to be deteriorating.  The system rewards people for poor parenting.  In theory, when a child is taken into care, the parents should inform HMRC that, after eight weeks, child benefit should cease.  There is no requirement of the care worker or the court making the order to do so.  In all the emotion of a child being removed, would you tell HMRC to stop paying you?

On the same basis, child benefits should be withdrawn for parts of the school year for children at boarding school but maybe the fine print covers that.

Child tax credits are a devious means of raising the tax take, from higher earnings, and the government claiming higher employment.  At £20 per week for the first child, parenting is a financial drain. Neither financial inducement is incentivising parents in poverty to perform better. Well-off parents do not need them.

Child benefits should be quadrupled, but only be given for the first two children and to parents earning less that £50,000 p.a.  The responsible official, court or care worker, should advise HMRC about children taken into care.  And child care tax credits should be abolished.