The Living Wage campaign is wrong-footing the right

I’ve long taken an interest in the Living Wage campaign, both as an opponent of their ultimate goal but also as an admirer of their strategy. Their aim, I believe, is the statutory enforcement of a ‘Living Wage’, which would effectively mean a pretty hefty hiking of the National Minimum Wage across the country. Though well intended, this is a bad idea: we would need a lot of evidence to discard the Econ 101 principle that price floors cause oversupplies, which in the case of labour we refer to as ‘unemployment’ and the evidence is, at best, divided.

But the Living Wage Foundation (and the LW campaign in general) has been far too canny to call for this outright. Instead, they have focused on getting big firms like Goldman Sachs to voluntarily sign up to pay their workers at least a Living Wage.

This isn’t hugely significant in financial terms: it's fair to assume that most employees and contractors at firms like Goldman Sachs were already earning above the Living Wage before they signed up. A jump from the NMW to the London Living Wage is very significant from the point of view of the individual employee (an extra £100/week for someone on 40 hours a week) but not too significant from the point of view of an employer like Goldman Sachs.

For these firms, signing up to pay a Living Wage may be a relatively cheap PR move. Or, to go back to that Econ 101 point: what these firms are paying for is not just the cleaning, but the image boost that comes from paying all of their their employees well. It’s possible that they’ve reduced employee breaks or labour hours, as often happens when the minimum wage is raised, but who knows.

I'm very pleased that Goldman Sachs is paying its cleaners more. I'd be pleased if more firms spent more of their marketing budgets on cash transfers to low-income workers in this way. But, as they say on the internet, the obvious point is obvious: even if Goldman can afford to pay a small number of its workers more to improve its image, firms in a less financially secure position may not be able to increase wages without bringing on the negative side effects previously mentioned. And, again pretty obviously, such PR only works if there are other firms that do not pay their workers a Living Wage.

The other interesting thing that the Living Wage Foundation has done is focus on government contractors – usually cleaners – who earn less than a Living Wage. Again, I don’t really mind this – there are reasonably good arguments that the government should set pay for civil servants as competitively as possible, but when it comes to cleaners earning a pittance, who really cares? As 'wastes' of taxpayer money go, this is hard to get worked up about.

This is all interesting to me because it puts free marketeers in an extraordinarily difficult position. Say nothing and the case for the Living Wage appears to be unopposable – perhaps allowing it to gain enough credibility that eventually it seems completely obvious that it should be legislated for. Go up against them, and we’re in the bizarre position of at least appearing argue against a private firm voluntarily paying its workers more because of consumer pressure. Isn’t that exactly what the market is supposed to do?

Low pay is a serious problem that will probably get worse before it gets better. We on the right do have our own answers: Tim Worstall has pointed out again and again that not taxing minimum wage workers would effectively give them a Living Wage. And reform of the welfare system to subsidise wages (perhaps through a Negative Income Tax) would be a very market-friendly way of helping the poor. But these don’t seem to have gained much traction as specific alternatives to raising the minimum wage. I'm left feeling quite glum: a voluntary Living Wage is basically a good thing, but a mandatory one would be terrible. Is there anything we can do to oppose one without seeming to oppose the other? I'm not sure.

George Monbiot really is a national treasure, isn't he?

If it weren't for the fact that The Guardian is where we send our national treasures to fossilise already we'd have to send George Monbiot there tout sweet. For he's now come up with an argument so absurd that nothing other than the journalistic equivalent of a peerage, that home at Comment is Free, could possibly be appropriate:

Planning laws inhibit prosperity. That's what we're told by almost everyone. Those long and tortuous negotiations over what should be built where are a brake on progress. All the major parties and most of the media believe that we would be better off with less regulation, less discussion and more speed. Try telling that to the people of Spain and Ireland. Town planning in those countries amounts to shaking a giant dustbin over the land. Houses are littered randomly across landscapes of tremendous beauty, and are so disaggregated that they're almost impossible to provide with public services. The result, of course, is a great advance in human welfare. Oh, wait a moment. No, it's economic collapse followed by mass unemployment. Spain and Ireland removed the brakes on progress and the car rolled over a precipice. Their barely regulated planning systems permitted the creation of property bubbles that trashed the economy along with the land.

No, really, we've not made this up. That really is what he said. That the absence of strict planning regimes creates housing bubbles. That free supply of land to build upon increases the price of housing.

This is, of course, a confusion of the difference between correlation and causation. It's true that the two countries had liberal planning systems (the Spanish one driven more by bribery than the law but still) and it's also true that the two had housing booms and subsequent busts. But the causation is not between those two things: rather, it's to their joint membership of the euro. Both economies were doing well while that of Germany was not. And within the eurozone interest rates were set to benefit the German economy, not the booming periphery. Thus rates were far too low for the broader economic conditions in Ireland and Spain: thus an asset bubble.

It was free money that drive those booms, not free planning permissions.

Video: Adam Smith Lecture 2014 by Scott Sumner

Scott Sumner's Adam Smith Lecture, delivered last week, is now online. For my money it's the best outline of his view of the Great Recession and the correct role of monetary policy that I have yet seen. Scott's presentation can be downloaded here, and Scott wrote about his trip for TheMoneyIllusion here.

Should we be concerned about the UK's current account deficit?

Every year since 1984 Britain has run a deficit on the current account of her Balance of Payments. What this in effect means is that each year British businesses and consumers have purchased consistently more goods and services from abroad than they have been able to sell. But is this a problem?

In his repudiation of mercantilism, Adam Smith believed that exchange rates and world trade contained a self-correcting mechanism. A trade deficit precipitates an outflow of currency from Britain, which in turn demands a greater supply of sterling, thereby naturally devaluing the currency. This in turn has the effect of making goods and services appear more price competitive, and should readjust the imbalance in trade to equilibrium.

However, since the 2008 recession and despite a 25% fall in the value of sterling, exports have increased by just 5%. Britain was unable to repeat the export-boom of 1992 which fostered a strong recovery from the 1993 recession.

On the one hand, the deficit stands at around 4.4% of GDP, and therefore is hardly an unmanageable anchor on the economy. Moreover, Britain has undergone significant restructuring since the end of the Second World War, away from manufacturing goods, and toward exporting invisibles, such as financial and education services. One effect of this has been that an economic upswing in the domestic economy tends to correlate with a widening trade deficit. British consumers and businesses have a considerable hunger for imports, and as they become wealthier and more prosperous, they buy goods from abroad at a faster rate than they can sell them overseas.

The import hunger is partly encouraged by the UK’s open and liberalised economy. Free trade pushes down the price of imports and provides domestic producers with the added pressure of foreign competition – a strong incentive function to become more efficient. Firms such as Dyson, with a strong Research and Development base in the UK, tend to import manufactures from South East Asia due to the absolute cost advantages these countries offer. Really then, the alternative to the current arrangement would be a return to the 1970s – with inefficient, over-manned industries dominating the landscape - and promoting import substitution. This would make most contemporaries baulk.

Perhaps then a current account balance is merely a reflection of the times we live in. Globalisation and the subsequent fall in transport costs have allowed the free movement of goods across national boundaries. The economy is simply adjusting to David Ricardo’s theory of ‘comparative advantage.’ Indeed, the UK will not return to building battleships or manufacturing textiles because production costs simply won’t permit it. Far better we produce the goods we are competitive at producing – in aerospace and pharmaceuticals – and focus on service exports – financial and legal.

The only caveat, perhaps, concerns the underlying message the persistent trade deficit is transmitting about Britain. A weak export base implies a fundamental lack of competitiveness in the economy. Productivity levels in the UK have been low by European standards for decades now. According to the ONS, in 2011 output per worker in the UK trailed 21% behind the rest of the G7. In effect what this means is that a British worker must work for 21% as much time in order to produce exactly the same amount of goods as his or her equivalent in France or Germany. This is a concern.

The government’s investment in British industry: through cutting corporation tax, encouraging inward investment and developing tight and highly skilled labour markets shows encouraging signs of progress in addressing these deficiencies in the UK’s competitiveness.

The EU: reform or redundancy

With UKIP set to increase further their share of the vote in the upcoming European elections, and Farage’s triumph over Nick Clegg in the televised debate late last month, the issue of EU membership is as heated and controversial as ever.  We are once more reminded of the strengths and limitations of a Common Market, and the anxieties the union has bred here in Britain. At its best, the European Union has the capacity to foster more harmonious economic relations, encouraging stronger trade, greater efficiency and stimulating investment. When one considers that 100 years ago, Europe was descending into four years of bloody warfare, the change couldn’t be starker. Indeed, regional development funds have been particularly positive, providing countries in Eastern Europe, Southern Italy and the Mediterranean with funds for infrastructure projects and capital spending. Meanwhile, promoting the principle of trade liberalisation has assisted in creating millions of jobs, and has allowed the Ricardian principle of ‘comparative advantage’ to flourish.

For Britain, the Union has provided a huge market for exports, with 500 million customers demanding goods and services on our doorstep. As is often cited by pro-Europeans, 50% of British exports are destined to the European Union. While, undoubtedly some of our trade with non-EU countries is diverted by European tariffs, the opportunities available to UK exporters from membership have been strong. According to some measures this trade supports between 3.5 and 4 million jobs in the UK. However, all is not well in the European Union.

Here in Britain, there are frustrations over the lethargy with which the EU has shown itself able to reform and adapt. A large and bureaucratic European budget, to which Britain is a net contributor, is increasingly becoming a source of resentment.

The more mercantile aspects of the European Union are a concern too. By promoting positive discrimination between member countries – through subsidies and external tariffs – the EU is effectively excluding non-member countries, particularly those in the developing world. The Common Agricultural Policy is perhaps the most tired aspect of the EU in this regard. Many of the subsidies made available through the CAP are directed towards wealthy landowners, who can buy entitlements. These landowners do not even have to farm the land to receive the subsidy.

Moreover, the global inequalities created by protectionism are shocking. The developed world injects around $300 billion every year into protecting agriculture, which is roughly six times the amount it spent on foreign aid in 2003. If we scrapped subsidies and tariffs on food, then the subsequent expansion of world trade would do much to raise living standards for developing world. This would be a sustainable way to alleviate suffering, cut food prices, and reduce trade distortion.

If the European Union does not adapt to the challenges it faces then the prospects going forward appear bleak. Reform must be guided by the principles of trade liberalisation, rolling back bureaucracy where it has become wasteful and meaningless, and driving competitiveness through higher investment and capital spending. These were principles upon which the union was first established, and must not be neglected or forgotten.

A very clever way of proving Lord Stern wrong

The particularly controversial part, from an economic point of view, of the Stern Review into climate change was the use of a very low (near zero) discount rate. The discount rate you use of course being vitally important as you try to translate possible future damages into current numbers so that you can compare them with hte current costs of trying to avoid those damages.

The argument was and is that we know that humans are subject to hyperbolic discounting. Given our lifespans we tend not to think about the far future as much as we perhaps should. Thus market interest rates are fine as a guide to events in coming decades but not to things in centuries.

There's now been a very clever piece of new research which measures how we do actually discount for events in that far future. English property law allows for both freehold land and leasehold: and those leases can be from a century to near a millennium long. Looking at the price difference between the two it is possible to work out that discount rate that we actually do apply:

We use these estimated price discounts to back out the implied discount rate that households use to value cash flows to housing that arise more than 100 years from now. We find the discount rate for very long-run housing cash flows to be about 2.6% per year. Interestingly, we find similar implied discount rates in both the UK and in Singapore – two countries with very different institutional settings.

This discount rate is rather higher than the one Stern used in his report. And the implication of that is that if we use this new and improved discount rate then our proposed carbon tax should be lower, we should be expending less effort in attempting to avert future climate change.

We could, of course, stamp our pretty little feet and insist that humans should not value the future in this manner. That all of us should value things as Stern says we should. But the fact is that we do not: and it's rather better to try to run the world taking account of the way we all are rather than as certain dreamers would have us be. And the simple truth seems to be that we value damages to people in a century or two rather less than the costs of averting them. So, we should do less to avert them.

UKTI—overseas or drowning?

Other blogs and reports on UKTI have mainly focused on the UK but what about UKTI operations overseas?  The National Audit Office reported, with its customary discretion, that our diplomatic posts were not commercially oriented and the linkages with the UKTI personnel embedded within them were poor.  Roles were confused and, by inference, the UK was not getting value for the “£420M spent by the FCO and UKTI on supporting UK business overseas 2012-13”.  The FCO promised to reform but they have been promising that for nigh on 100 years.

Visit the UKTI overseas websites and part of the problem becomes clear.  They are mostly the standard bromides about the role of UKTI.  The events to which they refer are not in the country in question but back in the UK, mostly foreign language courses.  The overall message in each one is about helping the nationals of that country export TO the UK.  “Business partnerships” is a term much used but they have it the wrong way round: UKTI is supposed to be building the UK economy through, inter alia, exports, not weakening our balance of payments through encouraging imports, still less weakening our manufacturers through increased competition.

The Morocco and Algeria UKTI websites make an interesting comparison.  The Morocco one names three UKTI representatives, with contact details and their specialist areas of expertise.  Exemplary.  The Algeria one just has the details of the British Embassy.  Maybe the switchboard there will find someone to take your call, maybe not.  My source in Algeria tells me that our last two ambassadors there found no one from UKTI up to the job and had to bring in two of their own FCO people to cover trade matters.  Obviously the ambassadors would be too diplomatic to confirm that.

So Morocco is well UKTI staffed and, given the size of its economy, possibly overstaffed, whereas Algeria, whose economy is twice the size of Morocco’s and has far more opportunities for British business, is barely staffed at all.

The coalition government has decided more exports would be good and therefore more money should be awarded to UKTI.  This is simplistic.  UKTI is drowning in its own bureaucracy.  They need to learn how to swim.

Economic Counter-Terrorism: Legalising the export of pharmaceutical-grade opium from Afghanistan

Vishal is the winner of the Adam Smith Institute’s 'Young Writer on Liberty' competition. The subject of the competition was '3 Policy Choices to make the UK a Freer Country', and below is one of Vishal's three submissions.

Although only 12% of Afghanistan’s land is arable, 70% of the population rely on agriculture for their subsistence and the country is the world’s largest producer of illicit opium (~90% of total global output). There has been discussion of granting farmers licenses to cultivate opium but we should also consider it as a potential method of covert, economic counter-insurgency. This would reduce the need for troops on the ground, alleviate poverty and deal with the NHS’ shortage of opioid drugs (this shortage has meant that people are literally dying of pain).

Many corporations (such as GlaxoSmithKline, Mallinckrodt, Abbott Laboratories and Johnson & Johnson) already legally import from India, Turkey and New Zealand. Why not add Afghanistan to the list and kill several birds with one stone?

Prior to the 2001 invasion, the Taliban declared opium ‘haram’ (sinful) and they sharply reduced opium output in Afghanistan during this crackdown. However, in a hypocritical move intended to help fund its insurgency, they have been earning money from opium farmers, smugglers, etc. – being the ‘middleman’ generates some serious revenue for the Taliban.

Legalisation would eliminate the need for middlemen by allowing farmers to directly supply to pharmaceutical companies instead. Farmers receive a fraction (<25%) of the profits. The rest goes to kingpins and warlords. One can easily see why the opium farmers would subsequently have a disincentive to fund any operations by the Taliban against those who are responsible for their livelihood and newfound wealth. How many producers could seriously be interested in killing off their customers?

Many young men have benefitted from the opium trade (becoming the ‘new rich’). So, supposing that the Taliban were to try to wrest control of cultivation or extort from the cultivating communities, they would be causing discontent amongst the same people whom they physically require to fight.

The Taliban pay up to $200/month for men to fight for them (versus the $70/month offered to join the national police force) – legalisation would give those youth some alternative, lucrative sources of employment. Fewer able, young Afghans willing to fight means that we wouldn’t require as many troops to be stationed there and that the Taliban’s grip over certain provinces would naturally loosen.

These self-reinforcing socioeconomic mechanisms, amongst others, would naturally undermine the Taliban both socially and financially.

 Legalisation can be a means of economic counter-terrorism that enables double-sided welfare gains and getting troops out sooner rather than later.

Mark Andreessen's half a good idea

Mark Andreessen has half a good idea here. He points out that while everyone's trying to create more Silicon Valleys that's not actually what we need. SV is the global agglomeration of the world's computing nerds and their necessary support services. That's what makes the place work. However, what we would rather like to have is similar global agglomerations of the world's materials processing nerds, of the geeks who get organic chemistry and so on. For this is the way that industries manage to develop: building themselves where people already grasp the basics. It's still true, for example, that if you'rte going to set up in non-ferrous metals in the UK you'll do it around Sheffield or Rotherham, if in pottery in the Potteries, chlorine chemistry is Tyne- and Tees- side.

So, politicians who would like a development cluster should look to what areas already have some footing in and then attempt to build upon them. That's sensible and that's the half the good idea. However, we then get to the other half:

Imagine a Bitcoin Valley, for instance, where some country fully legalizes cryptocurrencies for all financial functions. Or a Drone Valley, where a particular region removes all legal barriers to flying unmanned aerial vehicles locally. A Driverless Car Valley in a city that allows experimentation with different autonomous car designs, redesigned roadways and safety laws. A Stem Cell Valley. And so on. There’s a key difference from the if-you-build-it-they-will-come argument of yore. Here, the focus is more on driving regulatory competition between city, state and national governments. There are many new categories of innovation out there and entrepreneurs eager to go after opportunities within each of them. Rethinking the regulatory barriers in specific industries would better draw the startups, researchers and divisions of big companies that want to innovate in the vanguard of a particular domain—while also exploring and addressing many of the difficult regulatory issues along the way.

Selectively reduce the regulatory state in various areas and see what happens. But this doesn't go far enough: as we saw with the Urban Development Corporations of St. Maggie's era. For if reduced regulation is going to increase growth, and we are already assuming that, then why would we reduce regulation in only one geographic area?

Once we've accepted the basic argument, reduce regulation so as to encourage innovation, then our answer should be to reduce regulation everywheree.

Politicians Without Borders: A proposal to abolish the nationality requirement to run for election

Vishal is the winner of the Adam Smith Institute’s 'Young Writer on Liberty' competition. The subject of the competition was '3 Policy Choices to make the UK a Freer Country', and below is one of Vishal's three submissions.

If representative democracy is characterised by the citizens voting for those who they think will represent their interests most accurately – why is this choice restricted? I am referring specifically to the nationality requirement to run for election in all nation-states.

Interestingly, European Parliament elections do not require candidates to be of the same nationality as the citizens of the constituency they hope to represent. For example, Anita Pollack was an Australian who represented a UK constituency, Maurice Duverger was a Frenchman representing Italians, Ari Vatanen was a Finn who represented the French and Monica Frassoni was an Italian who represented Belgians. Why, then, should we be denied such choice when electing individuals to national parliaments?

One may argue that the right must be deprived due to security concerns and because ‘foreigners may not have the country’s best interests at heart’. However, we could say the same for domestic politicians – this is not sufficient. Furthermore, when we consider that there are many humanitarian projects in various countries that involve people of different nationalities, sometimes it might just be reasonable to believe thatpeople actually want to help others, regardless of their nationality!

Currently, all mainstream parties in all countries are nationalist and abolishing the nationality requirement would pave the way for non-nationalist alternatives (at the very least) which may actually help preserve peaceful relations with other countries by providing a voice to those who do not believe in a potentially dangerous, exclusionary nationalist agenda.

Furthermore, the extra competition from foreign nationals might make the transmission of public policy ideas and implementation of public policy more effective. Voters could essentially call for certain foreign politicians to run and ‘import’ politicians whose policies they think they would help the country more than their domestic alternatives (people might prefer, for example, some Scandinavian, German or American MPs). Essentially, domestic politicians would have to increase their performance in response to foreign competition and this would improve overall political performance over time.

After all, if George Osborne can legitimately appoint Mark Carney, a Canadian national, to control the country’s money supply on the grounds of competence, why should the British public not be able to directly elect the foreign politicians whom they would like to see governing the UK? Simply abolishing the nationality requirement and thereby increasing choice for voters would ultimately lead to a net gain in welfare for British society.