The impact of interest groups on public policy

Interest groups impact upon public policy in several ways.  Firstly, when legislation is being prepared, those drafting it consider the likely impact upon any specific and identifiable groups.  They consider the likely effect on the population as a whole, which is normally beneficial, but also consider any sub-groups of that population which might be adversely affected.  A proposal to open foreshore areas to ramblers will benefit those who might take advantage of their new-found rights, but might impact negatively on those who have previously enjoyed exclusive access.

Secondly, the legislators who are to determine public policy will take account of how interest groups might respond to it.  Some do this because those interest groups include numbers of their constituents whom the legislator wishes to represent properly, while others take account of the likely electoral impact.  All things being equal, they would rather have members of interest groups vote for them rather than against them.  Some politicians have made a policy of assembling sufficient support from interest groups to build a majority, even though their support of some interest groups has adverse effects on others.

Thirdly, it is sometimes the interest groups which take the lead in lobbying for legislative changes that will benefit their members.  This often takes the form of rent-seeking, in which the aim is to use legislation to secure improvements for their members that would not be attained in its absence.  A proposal that hairdressers should licensed, and that only qualified ones should be allowed to practise their trade, is one that brings advantages to existing hairdressers at the expense of those who might otherwise enter that trade in the future.  By limiting the numbers of competitors, it facilitates higher prices than would prevail otherwise.  Much lobbying for new regulation is of this form, seeking to benefit current practitioners at the expense of new ones.  A large established firm can afford the cost of meeting regulatory requirements more readily than can a start-up would-be competitor.

It is also common to see interest groups lobby against proposed changes in public policy because they perceive a threat to the continued well-being of their members, or some undermining of advantages they currently enjoy.  A proposal to end academic tenure in the United States might open up many employment and promotion opportunities to young academics, but it would meet with determined opposition from organizations that represent those who either have tenure or who perceive themselves to be on the brink of securing it.

There are, in addition, interest groups composed of those who share an ideological view and who are prepared to defend it against legislative changes that might run counter to it.  Those committed ideologically to promoting equality might well oppose any measures which could allow some to prosper more than others and thus bring about greater disparity.  Those of a conservative disposition who feel unsettled by change might well be prevailed upon to oppose measures that threaten to upset the status quo and replace it with something unknown.  This is not necessarily because they oppose the content of the proposed reform, just that they oppose change itself.

There are many groups who would not accept the description as conservative, but which nonetheless oppose many of the trappings of the modern world.  They can be rallied to oppose modern agriculture, genetic modification, new buildings, new modes of transport and new lifestyle freedoms.  At the root of some of this might lie a yearning for their own childhood when things were simpler and slower.  Many of them feel unhappy with growth and progress, and claim that the new opportunities and choices they present are unnecessary and even counter-productive.

Sometimes ideological opposition to change combines itself conveniently with self-interest.  It was 40 years ago in 1973 that I was first asked in the US to delineate the difference between a developer and a conservationist.  I was told that a developer was someone who wanted to build a mountain cabin in the wilderness, whereas a conservationist was someone who already had a mountain cabin in the wilderness.  Jocular and cynical though the answer is, it does express an essential truth: that many of those who oppose development already have access to enjoyment of amenities, and think these will be degraded if such enjoyment is extended to others.

Whatever the motivation that directs interest groups such as these, they present a serious problem to those who would provide innovative public policy solutions to social and economic problems.  Interest groups can thwart useful reforms, and they can also pressure legislators into introducing legislation that imposes costs on others to satisfy their rent-seeking aspirations.

In a democracy the size of an interest group is important, given the need of current legislators to secure re-election, and of would-be legislators to win votes.  Size, however, is not paramount.  The effectiveness of an interest group can, paradoxically, be inversely proportional to its size in some cases.  Consider the fact that in 1850 farmers in the US constituted 64 percent of the workforce. This had dropped by 1900 to 41 percent.  The figure today is 1.9 percent.  This means that US farmers have in one and a half centuries gone from nearly two-thirds of the workforce to fewer than one fiftieth of it today.  Yet few, if any, would dispute that farmers today comprise a far more effective interest group than they did then.  There is more pro-farmer legislation on the statute book, and they have more subsidies, supports and special rights than did their much more numerous predecessors.  It is easier for farmers’ lobbies to influence legislation now than it was then.

Self-awareness is often of more importance than the numbers in an interest group.  If people perceive themselves to be members of a group with known interests, the group itself can be more effective than if people lack such self-awareness.  Farmers know they are farmers and stand to benefit from pro-farming legislation.  Pensioners know that they are affected by changes to pensions that are introduced.  Rural dwellers know they can be affected by changes that take place to the countryside.  

Groups which are not self-consciously aware of their status are less effective.  If people do not realize how forthcoming legislation will impact upon their interests, they have no particular motivation either to endorse it or to oppose it, and will be difficult to rally on either side.  A measure which increases farm subsidies will, in general, command the enthusiastic support of farmers.  They can be organized to lobby legislators, to demonstrate, to write letters and to campaign in other ways.  The taxpayers who will foot the bill for these subsidies might be many times more numerous, but they are less self-consciously aware of their status.  They do not, in general, perceive themselves as losers, and are difficult to mobilize in favour or against specific measures that will affect tax levels.

Sometimes a group which stands to gain or to lose from particular policy proposals might not realize that it is in this position.  Those who object to a new power station being built, be they local residents or conservationists, can identify their interest.  Their amenity will be downgraded, or their ideological preferences circumvented.  They can organize opposition with those similarly affected and constitute an effective interest group.  On the other hand, the users of electricity, both present and future, those who stand to gain cheaper and more reliable energy supplies do not see themselves as beneficiaries.  They are dispersed and not conscious of their status as beneficiaries.  They will not normally organize as a lobby in favour of the power station to set against that which opposes it.  They are dispersed and their interest is not obvious to them.

There is a second important asymmetry.  It is that the smaller interest group which sees its advantage sees it as significant, whereas the larger group, if they do perceive their disadvantage, see it as relatively small.  A subsidy might make a huge difference to the living standards and prospects for farmers, yet cost taxpayers a near-negligible amount, maybe pennies a year.  The ones who stand to gain big have more motive to campaign than the larger group which sees its potential losses as tiny.

In this way legislators can act to benefit large numbers of small groups, all of which might be grateful from their gains and campaign for them.  And while the cumulative cost to taxpayers might be large, no individual measure is seen as worth campaigning about because the cost of each is small, and it is only the cumulative cost which is large.

Similarly the gains to large numbers from a new proposal might be seen by them as small, even marginal, whereas the loss of value perceived by the small group might be highly significant to them.  Thus the small group has a motive to campaign, whereas the large group does not.

A proposal for a new housing estate is seen by local residents as making a big difference to their lives.  It might degrade their view and impair the quality of some of their countryside.  It will probably mean more vehicles on the roads and more congestion.  It might lower the value of their own homes.

On the other hand, those who stand to gain, the people who might live in those new homes, do not usually know who they are.  To young people wishing their own home, or urban dwellers who would prefer to live in the country, the one new estate adds marginally to the choices and opportunities open to them, and even this small gain is usually unknown to most of them.  A big and perceived loss to a few contrasts with a marginal and unknown gain to the many.  This is why such contests are usually seen as being between local residents who stand to lose, against big business developers who stand to profit, rather than against the unknown people who might benefit from the development.

This asymmetry is particularly significant for the Conservative Party.  While its leadership might want economic development and growth, including new house-building, many of its MPs represent rural county constituencies whose residents are anxious to protect their existing amenities against the encroachment of new developments.  They might recognize a case for new housing and opportunities for young first time buyers, but all of them would prefer to have it take place somewhere else.  And all of the somewhere elses added together constitute almost the whole country.  This is the famous NIMBY phenomenon.

While the NIMBYs are prepared in principle to see development take place elsewhere, rather than in their own back yard, those whose ideology looks down on growth and development as such, preferring what they see as the measured rhythm of a slower pace of life, do not want any kind of development anywhere.  The acronym for them is BANANAs rather than NIMBYs, in that it stands for “Build Absolutely Nothing Anywhere Near Anyone.”

The effect of all these factors is twofold.  Firstly it acts as a brake on progress and development.  Entrenched interest groups, even though they might constitute a small minority, know their advantage is at stake, and are in a position to campaign, and the adverse publicity they generate can weaken the resolve of legislators to press ahead with the intended reforms. Thus policy proposals calculated to benefit the population in general can be thwarted at the hands of perhaps small numbers who perceive adverse consequences for themselves, and are sufficiently concentrated to be effective.

Secondly, relatively small interest groups can use the political process for rent-seeking activity that acts against the common good.  One by one they can impose burdens on the general populace that convey concentrated advantages for themselves, and even though the burden in each case might be small, taken together they can constitute a substantial drain on the resources of the many in order to secure advantages for the few.

The analysis thus far constitutes a critique.  It explains why policy proposals which could benefit the many are often blocked, while those that benefit the few at the general expense can succeed.  To these effects must be added the insights of Public Choice Theory, that legislators and administrators pursue policies which serve their own advantage, sometimes even in circumstances where this runs counter to the interests of the public they are nominally employed and empowered to serve.

These factors explain why reform can be difficult to achieve and why sometimes policies injurious to the general good are enacted.  The critique aids analysis, but does not, of itself, aid innovation.  The question arises as to whether there is a creative counterpart to this critique, an approach to policy formulation which takes account of the interest groups involved and somehow manages to neutralize or circumvent their opposition. 

The answer is that there is such an approach, and it is one which takes on board the likely responses of interest groups and which incorporates into the proposals measures calculated to prevent or to overcome their hostility.

One such technique is to identify the interest groups that will be affected by a policy innovation, and to build into the proposal measures to protect their perceived advantage.  This was done when the Post Office monopoly telephone service was privatized.  Rural dwellers were concerned that a telephone service run for profit would be less ready to connect remote country areas, and the county MPs were concerned on their behalf.  A requirement was written in to require the new company to connect remote areas, so the concerns were satisfied.  Groups representing disabled people worried that a for-profit service might be less prepared to offer the same services to disabled people, so it was made a requirement that the new company must offer such services.

Another technique is to offer affected groups something in exchange for their perceived loss of benefit, something that they value sufficiently to accept it as compensation.

Employees of the Post Office telephone service were concerned that a private company could not offer the same job guarantees as a public body could.  Their unions ran a campaign against privatization with posters depicting a pair of scissors cutting the cord of a telephone handset.  The company’s response was to offer employees the chance to become shareholders in the new company, and to share its success.  Employees were given preference in share applications, and any of them who bought 200 shares was given a further 200 shares free.  The union urged its members to oppose privatization, but over 90 percent of them took up the offer to buy shares.  The tactic here involved the recognition that the interest group’s leaders did not necessarily represent the opinions of their members.  In effect the government bid over the heads of the leaders with a direct appeal to the members themselves.

BT was successfully privatized in what was then the largest share issue in the world.  Some consumer groups feared that a BT monopoly would be exploited to the disadvantage of customers, so the privatization created a smaller competitor, Mercury (owned by Cable & Wireless), and BT was required to carry its signals into customers who chose it.  This assuaged the consumer groups, the more so when subsequent reviews were built in, at which time the number of permitted competitors would be increased.  One consequence is that the UK now has one of the world’s most competitive telecoms markets.

The approach of offering an interest groups something of greater value than the benefit foregone was used in housing policy in the late 1970s and early 1980s. Some 35 percent of Britons lived in state-owned houses, most at rents well below market levels. The political problem was that they constituted almost a rotten borough, electing legislators who supported subsidized rents at a cost to others paying local and national taxes.  The council house dwellers were an interest group well aware of their advantage, and all attempts to move rents towards market levels failed at a political level because state tenants voted against candidates who attempted this.

The new policy was the famous right-to-buy initiative.  If people valued their subsidized rents, they might value even more the opportunity to become home-owners at a discounted price.  State tenants were offered the chance to buy their own homes, with huge discounts on assessed market values, depending on how long they had lived there.  It was, in effect, a capital cost since for a one-off discount on the market price of the property, the government achieved an end to the annual subsidy on it.

Housing and house-building have always been an area in which interest groups impinge on policy.  It was true in the past and remains true today.  Ministers talk of the need for new homes, appealing to the young voters who might become home-owners, but must contend with the fact that large numbers of new houses will depress the price of the existing stock, adversely affecting current home-owners.  Since for most people their home is their most substantial item of saving or investment, their interest lies in rising values not in falling ones.  Current home-owners know who they are; future ones generally do not.

The technique of compensating an interest group with something of greater value has been used many times.  British Airways, when it was state-owned, needed to slim from 59,000 to 39,000 employees before it could operate efficiently and profitably as a private company.  None was threatened with dismissal.  Cash sums were offered instead to those prepared to leave voluntarily, and the sums were set high enough to encourage enough of them to do so.  Some used the money to achieve long-held desires to set up in business.  Again, from the BA point of view it was a capital cost, paying money up front in order to buy more efficient operation in future.

The voluntary and non-confrontational aspect of this approach has led to it becoming almost routine.  When local governments or business firms have to slim down owing to financial constraints, it is commonplace now for this to be don by voluntary redundancy, voluntary early retirement, or ‘natural wastage,’ meaning that departing and retiring employees are not replaced.  The approach is popular because the interest group is assuaged by this approach and does not cause trouble or embarrassment to the local authority or the business concerned.

The offer to an interest group to compensate them for loss of advantage need not be monetary.  People might be prepared to accept greater opportunities for advancement in return for lower job security.  It is often the case that the private sector does not provide the same level of job security as its public sector counterpart, but might provide easier opportunities for promotion.

Some people will accept greater independence and flexibility as compensation for a forgone advantage, valuing the chance to exercise more initiative and take more control over the circumstances of their employment.  The essential point is to adapt the policy initiative to incorporate some compensatory advantage, monetary or otherwise, to offer to an affected interest group, preferably at a level sufficient to soften their opposition.

The effect of all this is often to make the proposed initiative rather messy, with all kinds of ad hoc clauses included to placate interest groups that might otherwise thwart its passage.  This is true, but a messy proposal that succeeds is better than a clean one that fails to be implemented. Sometimes the concessions to interest groups will lower the value of what is being achieved.  Again, this is true, and again it is to be preferred to no achievement at all.

There can even be an issue of fairness, with critics saying that the advantages enjoyed by interest groups were unjust, and should not be compensated for.  The response to this might be that the compensatory offer is preferable to the continuation of that unjust advantage.  When state-owned houses were offered to their tenants, some middle class home-owning Conservatives objected.  Their case was that they had bought their houses the hard way, while the state tenants had for years paid below-market rents, made possible by the taxes paid by home-owners. Now the government was offering those tenants a chance to buy at a price below what their house was worth, and they thought this unfair.  The answer at the time was that the sale of council houses would end the continuing annual subsidy to support their rent, and that this one-off concession would reduce the demands made on taxpayers in the future.  

It undoubtedly entered the thinking of the government of the day that if state tenants became home-owners, they would no longer have an interest in voting for candidates who supported cheap rents, but might now have an interest in voting for candidates whose outlook seemed more favourable to home-owners.

Interest groups founded upon a shared ideology are often more difficult to compensate, since their interest might not be based on any personal advantage, but on a shared view of how society should operate or be constructed.  Teachers unions have opposed giving choices to parents or operating independence to schools because they are committed to a view of education in which children are allocated to school based on what are seen as the needs of the community, and in which schools are required to operate in like manner to each other.  For similar reasons the unions tend to oppose measures that devolve powers away from local education authorities down to individual schools.  There is probably no compensation that could be offered which would wean them away from that position.

There is the possibility, however, that even where an interest group cannot be placated by the offer of alternative or compensating advantages, it might be possible to call into being an interest group that could outweigh them.  In the case of the state houses, most local authorities were totally opposed to the initiative which reduced their housing stock and their ability to allocate it.  They were, however, outweighed by the new group of state tenants who saw themselves as prospective purchasers, and who had no interest in supporting their local authority’s resistance to the reform.

In the case of school choice, it is unlikely that any advantage offered to the teachers’ unions would placate their opposition, but there are two new groups that could outweigh their opposition by perceiving advantages for themselves in supporting it.  The first comprises parents who think their children might benefit if they had free choice between schools.  Those previously allocated places for their children in low quality schools would see benefit in being able to choose a better one for them, and like the prospective home-buyers, they would constitute a group much larger than the teachers’ unions, albeit more dispersed and less experienced at lobbying.

The second group is constituted from among the headteachers.  Many of them welcome the extra authority which comes with operating independence for their schools.  Many relish the chance to make and implement real decisions about how the school should be run, instead of being ciphers for a central authority which sends out detailed guidelines for them to follow.  While not as numerous as the teachers; unions, the headteachers generally command the respect of parents in a way that teachers’ s do not.

Thus the combination of school choice and operational independence for schools, while it cannot placate one interest group whose ideology sets it in opposition, can nonetheless conjure up two new groups to outweigh its influence.  A policy initiative, if it is to succeed, might therefore first consider how to win over any interest groups who might otherwise stand to lose out from its introduction, and secondly how to create new interest groups to counter-balance those who cannot be won over.

It was in this spirit that the Adam Smith Institute set out to solve the problems of a housing shortage without alienating existing home-owners whose amenity and value might be adversely affected, while securing the acquiescence of many of the environmental lobbies which have hitherto opposed more building.

The proposal began with an overview of existing land use in Britain.  Some 90 percent of us live in urban areas, and we occupy 8.6 percent of the total land space to do so. Nearly three-quarters of Britain (72 percent) is classified as ‘open space,’ and 11.6 percent is forested.

The popular vision of a green and pleasant countryside does not always accord with the reality.  Much land, including land in the green belts, is used for intensive farming, with large monoculture fields of crops much as wheat or rapeseed.  UK farms have a very high level of productivity, backed up by intensive use of fertilizers and pesticides.  They do not provide a diverse habitat for wildlife, and are not particularly environmentally friendly.

The ASI proposal is to convert 3 percent of farmland in England and Wales over a 10-year period.  The land would be converted in the following ratio: 90 percent would be given over to new woods and forests. 5 percent would be for housing, and 5 percent for supporting infrastructure.  Thus a total of 0.15 percent of farmland would become housing, and a further 0.15 percent for infrastructure.  The remaining 2.7 of that 3 percent would become wooded.

The principal change would see tree cover increase by 130,000 hectares, an increase of 11 percent.  The proposal is for the creation of diverse woodland, including small streams and lakes, providing a habitat for animal, birds and insects, and considerably friendlier to the environment that much of the agriculture it would replace.

The remaining tenth of the 3 percent of farmland converted would allow 950,000 homes to be built, together with supporting infrastructure.  This would make a considerable impact on the nation’s housing shortage, giving more opportunities for young and first-time buyers, and providing many more opportunities for those wanting to live in rural areas.  It would create new jobs in rural areas and boost the nation’s economy at the same time.  Interest groups which seek a vibrant rural economy with jobs available for young people there should welcome this. 

Existing home-owners in the countryside constitute the biggest potential interest group opposed to new housing there, but they are offered something in return.  Fairly unsightly and unfriendly fields of monoculture would be replaced by woods with attendant wildlife.  None of the new houses need be overlooked by existing houses.  Instead of their view being spoiled by the sight of new houses, current countryside dwellers would find it improved by the new woods created. 

Environmentalists and conservationists who would normally object to new building in rural areas are offered something in return.  The new woods would be friendlier to the environment than the crop fields they replaced, and would provide a diverse habitat for wildlife.  Furthermore, the reduced use of fertilizers and pesticides, combined with the carbon absorbing effects of the extended tree cover, would count as a considerable environmental improvement.

People who are ideologically opposed to all development, growth and human activity would not be satisfied, but many environmentalists would accept the trade, regarding the new homes built as an acceptable price for the environmental gains of the new woodland.  There would be a very small loss of green belt land, but in compensation there would be major environmental improvement of other green belt land, nine times more than any lost.

It is quite common in disputes involving potential rural development to have winners and losers.  Usually it is either the developers or the conservationists who win, the one at the expense of the other.  This proposal, by contrast, is deliberately structured in such a way that there is something in it for most groups to come out ahead, with only a tiny group unsatisfied because it conflicts with their ideology.  The other groups can all benefit, and this includes the building firms, the would-be home-buyers, current rural home-owners, those wanting to sustain the rural economy, the environmentalists and conservationists who seek less chemical pollution and an improved environment for plants and animals, and those who simply want the countryside to look nicer.  It is structured so that nearly everyone can come out as winners.

This process of identifying the interest groups and incorporating measures to build in their support or to at least mute their opposition is not a particularly easy one.  It is comparatively straightforward to identify interest groups that might stand to lose out from a new policy initiative.  Indeed, some will step forward to identify themselves by noisy opposition to the proposals.  But the process of thinking up and incorporating measures that might assuage them is less straightforward.  It is essentially creative activity that requires the flashes of invention and insight that are required for new ides to emerge.  It is by no means a deductive process or one that can be carried out by following a formula.  

Nonetheless it offers a way round the impasse which is caused when groups which stand to lose an advantage currently enjoyed will campaign to thwart new policy initiatives that might benefit the many.  It minimizes the conflict which reform proposals can cause, especially in controversial areas such as development and land use change, and it does this by making allies of its potential opponents. By identifying potential opponents before the proposals are set in final form, and by co-opting them with bolt-on measures for their benefit, it smoothes the path for desired reforms without the rancour and adversarial politics that reforms can often trigger.

There are two extras.  This approach promises to shorten the time that reform measures can take as they make their way through the inquiries and court procedures normally put in their path.  And finally it has the additional effect of increasing the number of policy initiatives that make their way safely through onto the statute book or into implementation.  Whether or not you regard that as a good thing depends on how satisfied you are with the current status quo and how ready you are to accept that reform need not always be for the worse.

The impact of interest groups on public policy

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Madsen's lecture, as Senior Visiting Fellow in the Department of Land Economy at the University of Cambridge, has now been posted on the ASI site.

The topic deals with the way in which interest groups impact upon public policy in ways that might be to their own advantage, though not necessarily conducive to the general good.  Madsen identifies with the various ways in which they exert influence on legislators.  He goes on to show how policies can be crafted to deal with their influence and turn it to advantage if possible, and circumvent it if necessary.  He gives examples throughout.

The full text of the lecture can be seen here.

Well of course companies dictate corporate tax rates

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How else does anyone think this happens? The point being not that the head of the CBI phones George up and dictates what the corporate tax rate would be (not that George would give much mind to the CBI anyway), but that the rate of tax that can be charged depends upon the reaction to it of those the tax is being levied upon. All of which makes the vapours that people are having over this comment somewhat mysterious:

The UK’s tax policy is effectively dictated by companies and not ministers, according to a leading barrister and adviser to the treasury on its recent “Google tax”.

Philip Baker QC said policymakers and tax experts had learned over recent decades that the mobility of companies and jobs meant there was “no question [countries] have to be competitive to survive”. As a consequence, governments had to provide the tax policies that international corporations wanted.

So, why do we not have 100% income tax rates on pay over £7.00 an hour? Because we know that just about everyone would bugger off out of the country making being the politicians running it really no fun at all. why don't we have VAT at 100% on everything? Because that storm for the ferries would be just the same as most fled such an extortionate tax regime. If, of course, we didn't all just ignore it and deal in cash.

so, why do we have a reasonably reasonable corporate tax system and rate? Because it's easy enough for a company to leave the country and go and try to make a profit elsewhere. Therefore their mobility really does tax our ability, dictate to the government, to tax them.

There's really nothing mysterious about this at all. We all realise that a restaurant where they ceremonially spat on the soup at each and every table would get very little customs (not none as there's nowt so strange as folk) for we would be dictating our rejection of the practice by staying away.

Why would anyone think that taxation would be different?

Seven Misconceptions About Europe

Myths and deceptions abound concerning the EU and Britain's place within it or outside it.  Oliver Lewis in the Spectator has done a workmanlike and admirably brief summary of what he calls "Ten myths about Brexit," identifying scare stories.  There are also 7 common errors about Europe that will almost certainly feature in the debate.  Some are misconceptions and self-deceptions, but all are untrue.

1.  The first is the misidentification of Europe with the EU.  "Britain must stay in Europe."  "Our future belongs in Europe."  Although the term "Europe" is often used in Britain to refer to "the Continent," Britain is part of Europe.  The land link that connects England, Wales & Scotland to mainland Europe is under the Channel, but islands of European countries are included in the term.  The European Union, by contrast, is a political and economic association of some European countries.  It does not include such European countries as Norway, Switzerland and Iceland.  If the UK leaves the EU, it will remain part of Europe, sharing the cultural heritage and the links forged by history.

2.  It is not true that if the UK chooses to leave the EU, we will be like Norway, having to accept EU rules, but having no further say in the framing of them.  Countries outside the EU have to meet EU rules for goods they export there, but do not have to meet EU rules for their domestic goods or for ones they export to world markets.  The UK might seek a relationship with the EU similar to that between the EU and the USA, or between the EU and China, or it might opt for a closer one such as that enjoyed by Switzerland.  There are several options.

3.  We are told that the UK has not lost sovereignty to the EU; it has pooled sovereignty with other nations.  This might have some truth in a technical sense, but little in a practical sense.  The UK can exercise a say in EU deliberations, but it is routinely outvoted by nations with a totally different conception of law and of the role of the state.  The UK has a tradition of Common Law, and of looser reins of state direction than most of its EU counterparts.  Other EU nations often combine to pass laws that Britain perceives to be against its interest.  Britain, on the other hand, has little impact on what happens in Continental countries.

4.  The EU deal claimed that it was worthwhile for its member nations each to sacrifice some individual sovereignty in order to achieve EU-wide rules that would enable all members to prosper.  This was the argument put to encourage the UK to join in 1973 and to reaffirm its membership in 1975.  Britain was then the "sick man of Europe" because of its basket-case economy.  Times have changed.  UK growth now easily outstrips the EU's.  It is creating more jobs than the other members combined.  Meanwhile countries such as Greece, Italy, Spain and Portugal are searching for the prosperity that was supposed to follow their surrender of sovereignty.

5.  The loudest misconception is that British jobs would disappear if the UK left the EU.  As Lewis points out, the famous "3 million jobs will disappear" dates back to a 2000 study by the National Institute for Economic & Social Research that simply counted the jobs sustained by exports to the EU.  EU customers would not suddenly stop buying British goods if Britain were no longer an EU member.  They buy goods from many countries, including the US and China, and would continue to buy from the UK.  It is in their interest to do so.  Worldwide trade agreements from the WTO onwards would ensure that the UK and the EU had access to each other's markets.  If anything, jobs would be created if Britain were free to trade with the rest of the world on its own terms.

6.  We are told that foreign investment would cease to flow in if Britain were not part of the EU project.  The same claim was made if Britain did not join the euro. It remained outside, yet last year saw the highest level of inward investment in the UK in over a quarter of a century.  It makes the same mistake as the claim over lost jobs, the assumption that UK trade with the EU would splutter to a halt without full UK membership.  Since the UK has a huge trade deficit with the rest of the EU, it is scarcely credible that other EU members would wish to reduce trade with Britain.

7.  Various special interests which benefit from the EU budget have expressed alarm that their grants would disappear if Britain left the EU.  Universities are concerned about research grants, farmers about agricultural subsidies.  It is true that some UK interests count on EU grants that would disappear.  It is also true, however, that the UK contribution to the EU budget would also disappear, a sum that dwarfs the grants made to interest groups.  This would leave the UK government ample funds to replace such of those grants as it saw merit in sustaining.

It is quite possible that Mr Cameron will secure an advantageous deal from his EU colleagues that allows the UK to protect its sovereignty while enjoying a vigorous trading relationship with its partners.  If he does, the British people might well vote to accept that deal.  It will be better for the debate leading up to that vote, however, if the above misconceptions about the Europe and the EU are laid to rest.

Misconceptions about Europe

Madsen has written a think piece listing seven common misconceptions about Europe that are certain to feature in the referendum debate.  They are:

  • The EU is "Europe"

  • If the UK leaves, it will, like Norway, have to follow rules it cannot help shape

  • That the UK has not lost sovereignty, only pooled it with other EU members

  • That the EU membership involves sacrificing some sovereignty in return for substantial economic growth

  • That huge numbers of UK jobs would disappear if the UK left the EU

  • That foreign investment into Britain would cease without EU membership

  • That special interests (such as universities and farmers) could not manage without the EU grants they receive

Madsen concludes:

It is quite possible that Mr Cameron will secure an advantageous deal from his EU colleagues that allows the UK to protect its sovereignty while enjoying a vigorous trading relationship with its partners.  If he does, the British people might well vote to accept that deal.  It will be better for the debate leading up to that vote, however, if the above misconceptions about the Europe and the EU are laid to rest.

You can read the full text of his piece here.

From the Annals Of Really Bad Science Journal

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This is simply terrible:

Imposing a minimum unit price for alcohol leads to a dramatic fall in drink-related crime, including murders, sexual assaults and drink-driving, a new study shows.

Crimes perpetrated against people, including violent assaults, fell by 9.17% when the price of alcohol was increased by 10% over nine years in the Canadian province of British Columbia. Motoring offences linked to alcohol, such as killing or injuring someone with a vehicle and refusing to take a breath test, fell even more – by 18.8% – the study found.

An interesting finding but how good is the science?

Method: A time-series cross-sectional panel study was conducted using mixed model regression analysis to explore associations between minimum alcohol prices, densities of liquor outlets, and crime outcomes across 89 local health areas of British Columbia between 2002 and 2010. Archival data on minimum alcohol prices, per capita alcohol outlet densities, and ecological demographic characteristics were related to measures of crimes against persons, alcohol-related traffic violations, and non–alcohol-related traffic violations. Analyses were adjusted for temporal and regional autocorrelation.

Results: A 10% increase in provincial minimum alcohol prices was associated with an 18.81% (95% CI: ±17.99%, p < .05) reduction in alcohol-related traffic violations, a 9.17% (95% CI: ±5.95%, p < .01) reduction in crimes against persons, and a 9.39% (95% CI: ±3.80%, p .05). Densities of private liquor stores were not significantly associated with alcohol-involved traffic violations or crimes against persons, though they were with non–alcohol-related traffic violations.

So, they examined minimum alcohol prices and traffic violations in British Columbia. What did they not measure? Changes in traffic violations in Canadian society in general. In, perhaps, areas that did not have the rise in minimum pricing.

For all the ordure that it thrown at economists and their models these days at least this would never be published in an economics journal. Because the first reviewer, heck, even the editor pondering whether to send it out for review, would first ask, well, what was that general change so that we can measure the effects of this specific change against it?

Not that we're about to do that detailed analysis, we'll leave that to the excellent Chris Snowdon over at the IEA. But an indication from Canada's 2010 crime statistics:

In 2010, police reported about 84,400 incidents of impaired driving (Table 4). The number of impaired driving offences reported by police can be influenced by many factors including legislative changes, enforcement practices (e.g. increased use of roadside checks) and changing attitudes on drinking and driving.

The 2010 rate of impaired driving was down 6% from the previous year, representing the first decrease in this offence since 2006 (Chart 14). The rate of impaired driving has been generally declining since peaking in 1981.

No, we don't know but we've got at least a definite impression. Booze related driving incidents have been declining in general for 30 years. To the point that in the final year alone of this paper's measurements they actually declined nationwide by 6%. And they're trying to pin an 18% decline over a decade on a minimum price change that only happened in one province?

And they don't compare the declines in that one province with other provinces?

This might be all sorts of things but it ain't science, is it?

But this is impossible under modern monetary theory!

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Or perhaps we should revise that to a "this is impossible under a deeply deluded understanding of modern monetary theory". For there's a certain segment of the populace who insist that banks just make up money out of thin air. So, therefore, this can never happen:

Ordinary Greeks rushed to withdraw cash from ATMs in the early hours of Saturday morning. Greece's Alpha Bank stopped all online transactions according to its website on Friday night.

If banks do just create money ab nihilo then this cannot possibly happen. There is no possibility of a bank ever running out of money, is there? But this is happening. Therefore it cannot be true that banks do indeed just create money out of nothing.

The confusion comes from the way in which credit is created: this is indeed done by the banking system in a fractional reserve banking system. You or I go to borrow money and the money we borrow is indeed simply created, as a ledger transaction, by that bank at that time. So, to some that seems the end of the matter. But at 4 or 4.30 that afternoon, that bank has to balance its books. It must have sufficient deposits to fund all of its loans, and if it does not through its branches it must go out into the more general market and solicit some more deposits. So, that effortless creation of money only lasts until that daily point at which it must balance the books.

And, of course, the same occurs in reverse when people are reducing their deposits at said bank. It must either claw back the loans it has made (something that takes time) or it must collect more deposits from the wholesale system or it must deny people the right to extract their deposits. Because, once a day at least, those books must balance.

In a world where banks effortlessly print or make as much money as they wish banks runs cannot happen. We are seeing a bank run: therefore banks cannot effortlessly print or make all the money they wish. Monetary theory's just great but even that has to be checked against reality occasionally.

Antony Fisher, herald of freedom

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One hundred years ago was born someone you have probably never heard of, but who helped bring freedom to large parts of the world. 

The story of Sir Antony Fisher shows how one person with a vision can change history. He was a Battle of Britain pilot in World War II – a conflict that claimed the lives of his brother and two cousins. After the War, he grew despondent that the freedoms his family members had died for were being casually thrown away. The radical 1945 Attlee government nationalized all the main industries – coal, steel, electricity, railroads – and created a ‘Welfare State’ with state healthcare, public housing, and ‘cradle to grave’ social benefits.

Fisher thought about going into politics. But by chance he read the Reader’s Digest abridgement of F A Hayek’s The Road to Serfdom, a book that showed how European socialism morphed, too easily, into Nazi totalitarianism. So he visited Hayek, who told him bluntly to forget politics. Politicians just follow prevailing opinions. If you want to change events, change ideas.

Fisher went on to pioneer battery farming, turning chicken from a luxury to a staple food in war-impoverished Britain, and used his early profits to follow Hayek’s advice. In 1955 he created the Institute of Economic Affairs, which pumped out books and articles, explaining the advantages of personal and economic freedom over state control. When Margaret Thatcher became Tory leader in 1975, she devoured its ideas, famously forcing aides to read Hayek’s Constitution of Liberty and telling them “This is what we believe!”

The IEA gave Thatcher’s gut belief in freedom a deep intellectual foundation, making her not just a politician but a formidable champion of freedom. That made her a hugely important ally to Ronald Regan. Thatcher saw the Soviet Union as not just morally but intellectually bankrupt, and as such it could be faced down. She and Reagan succeeded.

But Fisher did not stop there. He helped create one new ideas factory after another – the Fraser Institute in Vancouver, the Manhattan Institute in New York, the Pacific Research Institute in California. He set up the Atlas Foundation as a catalyst to help start even more. By 1988 there were already 35 think tanks in the Atlas family. Today there are 450.

They are changing events all over the world – from land reform in Peru, through privatization in Britain, public debt control in Pakistan, to low-cost private education in India. And spreading the ideas of liberty in even the most unlikely places, in the Muslim world from Morocco through Turkey to Yemen and  Kazakhstan; in Africa from Mali and Ivory Coast to Ethiopia; in Europe and the Far East. 

Antony Fisher was an unassuming man who helped change history and who is now helping change the future. As Oliver Letwin MP put it in the Times in May 1994, that is “quite a chain of consequences for a chicken farmer.” Quite so.

Owen Jones and labour economics

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It appears that the latest campaign from Owen Jones and all things left is about the shameful way in which the self-employed are treated. Given that this group includes both Jones and your humble writer this is of course something of great interest. Sadly however, Jones is, as usual, entirely at sea with any economic concept more complex that "it's all so unfair, innit?"

If booming levels of self-employment are an indicator of a thriving economy, then Greece is the powerhouse of Europe. Just under a third of the population of this austerity-ravaged nation are self-employed, more than double the EU average. Spain is another go-getters’ paradise, it seems: with half an entire generation out of work, self-employment among the young has surged. And then there’s Britain, where around 40% of the rise in jobs since 2010 is down to self-employment. If our rulers are to be believed, here is entrepreneurial flair and British dynamism in action, a vindication of the government’s “long-term economic plan”. But the plight of the self-employed is being ignored. It is time that the left began championing their cause.

Well, strip this of the rhetoric and perhaps there is a point there. Spain and Greece do indeed have a paucity of jobs and a surplus of people who would like to do one. So, what's the cause of this? The amount that people are willing to pay to get a job done is lower than the amount that people are willing to accept to do a job. As we know, prices adjust to balance the supply and demand for anything, this is the function of a market.

As we also know if, through government action, that market is not allowed to change prices so as to balance supply and demand then it will balance anyway.

But self-employment spells precariousness, insecurity and falling living standards for all too many. Last week George Osborne lauded figures indicating that wages were rising; but what is often neglected is that the 15% of British workers who are self-employed are stripped out of these figures. There is little up-to-date research on their income, but the Resolution Foundation suggests that between 2006-07 and 2011-12 their weekly earnings dipped by a staggering 20% – and there was a big rise in underemployment, or self-employed people doing far fewer hours than they would like.

Quite so. Given that formal employment costs more than employers are willing to pay (or, the same thing, that the government imposition of conditions and extra costs makes the residual wage lower than people will accept) then the price of employment is lowered by side stepping some of those costs of employment.

Self-employment is often a means for businesses to hire workers without offering the rights and responsibilities that normally come with employment: private pensions, paid holidays, sick pay or maternity leave, for example.

Again, quite so. We have imposed, through government, a series of costs that are part of compensation but not a part of wages. Thus, if a system exists where those compensation costs can be avoided, and the total compensation is more than the market clearing price, then some part of the labour force will end up with the wages only, and not that compensation part.

So, what is the solution here? Well, if it's government action forcing the price of labour above the market clearing price then the answer would seem to be to stop that government action that does so. Jones, and all things left are of course arguing that such costs should be forced upon all so that even more people can be unemployed. Quite why this is a good idea we're not sure.

But our larger point here is that we are once again seeing the entire blindness of a certain section of the commentariat to reality. If self-employment is rising, because it means that people can escape the costs of employment, which is indeed the analysis they are offering, then this is evidence that the costs of employment are too high. The solution is thus to lower those costs of employment.

The most obvious place to start doing that is to abolish employers' national insurance. This is, after all, one of the major costs that this sort of employment arbitrage is designed to avoid.

We're even, at this point, willing to agree that there might be something to the basic analysis on offer. As long as, of course, Jones and all things left are willing to agree with our solution: lower taxes on employment.

STEM: men go to Mars, women go to Venus

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Tim Hunt, the Nobel prizewinning UCL biologist recently chased out of his professorship by a baying mob for joking that women scientists cause problems by falling in love with their male counterparts and crying if you criticise them, was recently asked if he thought the relative dearth of women in harder sciences was a problem. He said, in the purest crimethink:

I’m not sure there is really a problem, actually. People just look at the statistics. I dare, myself, think there is any discrimination, either for or against men or women. I think people are really good at selecting good scientists but I must admit the inequalities in the outcomes, especially at the higher end, are quite staggering. And I have no idea what the reasons are. One should start asking why women being under-represented in senior positions is such a big problem. Is this actually a bad thing? It is not immediately obvious for me … is this bad for women? Or bad for science? Or bad for society? I don’t know, it clearly upsets people a lot.

Although not directly responding to Hunt, prominent Spanish language website Politikon has a piece up (kindly translated for me) pre-emptively denying that the sorts of relevant sex differences that might cause these differences ‘legitimately’ exist.

Of course everyone accepts that there are huge differences between men and women in some domains. For example no one thinks than men’s thicker jaws or higher basal metabolic rates are socially constructed. No one thinks the fact that even athletically-trained women are much weaker than normal men is down to society.

But some people, including author Guido Corradi, do think that social construction is responsible for men and boys being judged better at mathematical subjects. He attacks Simon Baron-Cohen as a main progenitor of this view, and suggests the perspective is speculative and lacking evidentiary backing. He accepts that men are stronger at visuospatial skills (e.g. 3D mentalrotation), but not that they are stronger mathematically overall.

More recent studies (Lindberg, et al. 2010) support the hypothesis that there are no mathematical skill differences. It has to be mentioned that since they started to be tracked, differences in general mathematical achievement have been decreasing. In a seminal meta-analysis by Hyde (1990) this tendency is observed.

Lindberg et al. do seem to convincingly show us that girls and boys are equally good at maths on average. But this doesn’t mean that things are the same the whole way along the scale, because men may differ more widely than women. Corradi appears to know that this possibility exists, but completely dismisses the point without considering it seriously.

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Lindberg et al. find a small variability ratio, of 1.08, but other studies suggest this is still enough for a substantial gap at the top end. Johnson et al. (2008) at the highest level of mental ability, there tends to be a ratio of two men to each woman. Deary et al. (2007) find, in a sibling study to control for genes and environment, that when you get to the top 2%, there are also about two times as many men as women.

We can see how this opens up a wedge when you start selecting particularly talented groups, e.g. SAT-takers:

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And it widens by the time you get to GRE:

Screen-Shot-2015-06-24-at-13.09.42This explains part of the different attainment between men and women in Science Technology Engineering and Mathematics, but ratios at the level of tenure track positions are somewhere in the range of 7:1 to 14:1, leaving a lot left over. Is this down to discrimination? Stereotyping? Social construction? Different preferences?

One large part of the gap is down to the distribution of skills. Women who have high mathematical skills are more likely than men to also have high verbal skills, opening up a number of extra options the men at that level don’t have. Those with high verbal skills tend to take these options. This explains a fraction of the remaining gap.

On the other hand stereotype threat, which Corradi alludes to, is much in vogue. I myself, I must admit, promoted one of the studies suggesting that male-female mathematics differences could be down to stereotyping. But it doesn’t seem like these results have held up over replication (e.g.this meta-analysismoremoremore).

By contrast, men and women do seem to have starkly different preferences about how their lives should go. For example, women tend to like different kinds of relationships (one-on-one 'dyadic’ pairings vs. gregarious multipolar groupings), and they tend to do more child-rearing.

Women (even the most talented women) tend to want to work less and more flexibly; neither of which fit with the long blocks of hours expected at the top of STEM professions or in STEM academia. Goldin (2014) explains how this leads to no gender wage gaps in industries with constant returns to hours, and large ones in industries where 60 hours work in a week is more than double as productive as 30 hours.

Su & Rounds (2015) review 52 samples between 1964 and 2007, including  209,810 male and 223,268 female respondents and find large differences in interests.

We found gender differences in interests to vary largely by STEM field, with the largest gender differences in interests favoring men observed in engineering disciplines (d = 0.83–1.21), and in contrast, gender differences in interests favoring women in social sciences and medical services (d = −0.33 and −0.40, respectively). Importantly, the gender composition (percentages of women) in STEM fields reflects these gender differences in interests.

Overall the evidence seems to tell us that though men and women are equally smart, men are more prominent on both tails: they are more likely to be very dull and very bright. This variance isn’t huge overall, but when you start selecting for the top 0.01% or the top 0.0001%, like Fields Medallists, Nobel Prizewinners, or Harvard Professors the differences become overwhelming. The women who do have these incredible quantitative skills often also have excellent verbal skills, giving them alternatives they prefer.

While there may be residual discrimination, there is substantial evidence that on top of differing variance and skill distribution, men and women also have different preferences. Women tend to prefer to do less hours and focus more on the other important things in life. Men want to compete, earn lots of money, and work with objects.

Corradi makes a rash and unwarranted leap: there is good evidence for multifarious sex differences—not just in cognitive ability but in interests and preferences—that make complete and exact similarity between men and women in STEM a mirage.