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


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!


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


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


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

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.


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:


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.

Why the Bank of England should end its stress tests: ‘No Stress’ in a nutshell

In December last year the Bank of England reported the results of its first set of annual stress tests of the capital adequacy of the UK banking system. Its message was reassuring: our banks are safe.

Don’t believe a word of it. The banking system is actually highly vulnerable and the stress tests merely hide that fact. Indeed, they even make the banking system less safe than it already is, by pressuring banks to take hidden risks that the risk models cannot see. 

The stress tests are flawed in three distinct ways. 

The first is methodological. The tests are based on one scenario and cannot possibly give us confidence the system is safe against all the other possible scenarios they did not consider. They are based on a ‘risk-weighted’ asset metric that is unreliable because it is dependent on gameable risk models that under-estimate banks’ risks – and the system incentivizes banks to game the models to get lower capital requirements and thence higher distributions of false profits. They create systemic instability by pressuring banks to use the same models that are blind to the same risks. They lack credibility because even if the central bank thinks there are major banking problems, it cannot publicly admit to them – to do so would undermine confidence and lead to questions about its own past competence in rebuilding the banking system. The results then have all the credibility of a rigged election. 

Even if we ignore these problems, the stress tests are fatally flawed because they use a very low ‘pass’ standard, a 4.5 percent minimum ratio of capital to risk-weighted assets. This minimum is well below those coming through under Basel III. Had the Bank carried out a test using these latter minima, the banking system would have failed the test: same exercise, higher safety standard, opposite result. 

The Bank also failed to carry out any tests based on a minimum ratio of capital to leverage – a test that would have been more reliable because it is much less dependent on unreliable risk models. Even the most undemanding such test – one based on a minimum leverage ratio of only 3% - would have revealed that the banking system was very weak. The Bank’s failure to apply this latter test is all the more puzzling because the Bank expects UK banks to meet this minimum standard. Thus, the Bank asks us to believe the banking system is sound, despite the fact that a 3 percent leverage ratio test based on what it currently expects from banks and based on its own stress scenario would have suggested otherwise. One might add that many experts recommend a minimum leverage ratio of 15 percent, five times larger than the leverage test that the Bank did not conduct, or at least report. You can imagine the results. 

One can only speculate why the Bank did not report the results of these alternative tests, but one thing is sure: the comforting headlines last December would have been rather different had they done so. 

Overseas experience also indicates that stress tests are useless as indicators of bank vulnerability and can go catastrophically awry. Recent stress tests failed to notice the impending collapse, not just of one but of three national banking systems: Iceland in 2008, Ireland in 2010 and Cyprus in 2013, all of which collapsed shortly after being signed off as safe by regulatory stress tests. The European stress tests missed the latter two collapses, but also have a history of being captured by powerful banks and the Euro elite – and of using very unstressful stress scenarios to produce loss projections that turned out to be dramatically short of subsequently realized losses. 

The most recent European stress tests would appear to be no exception: the ECB party line was that all was well in the European core despite problems in the fringe countries, but these were dismissed on publication by a variety of experts who pointed out that it was the big French and German banks that were most vulnerable. However, the European stress tests overlooked their vulnerability because they used ‘risk-weighted’ asset measures that were blind to their main risks instead of leverage measures that would have revealed them – the same mistakes that were made by the Bank of England. 

Stress tests operate like a radar that cannot see any hazards. We wouldn’t dream of sending out a ship or plane reliant on a radar that didn’t work. We really shouldn’t do that with our banking system either: the Bank of England should abort its stress testing program forthwith. 

Kevin Dowd is the author of the Adam Smith Institute's most recent report 'No Stress', which is available here.

Equality of opportunity or equality of outcome?


We find this all rather sad really:

Britain has too many stay-at-home mothers and must do more to get them into work, the European Union has said. British women are twice as likely as those in the rest of Europe to choose not to work in order to care for their children or elderly relations, EU figures show. The large number of mothers who work part-time or not at all is a “social challenge” that the Government must address by providing more state-funded child care, according to a report issued by the European Council.

The sadness coming from the clear confusion here between equality of opportunity and equality of outcome.

“Despite the positive trends in relation to labour market outcomes, social challenges persist,” it says. “The difference in the share of part-time work between women (42.6 % in 2013) and men (13.2 % in 2013) is one of the highest in the Union. “The percentage of women who are inactive or work part-time due to personal and family responsibilities (12.5 %) was almost twice as high as the EU average (6.3 %) in 2013.”

The aim is not to insist that as many women work full time outside the home as do men. For we are not looking for equality of outcome in gender and work, as we are not in most other areas of life. We're actually looking for equality of opportunity in how people desire to organise their lives. And these same figures that appear to be a problem show that in this respect the UK does very well.

We have an extremely flexible labour market. Some to many women actually desire to raise their own children: also to combine that with some part time work perhaps. It's exactly this choice that the UK does offer. We're the ones getting it right. Those who wish to work full time can indeed do so. Those who wish to work part time, whether male or female, mothers or not, also get to do so. We've a system which offers the maximum freedom for people to organise their lives as they wish. Which is the point and purpose of how we organise society: to maximise choice and opportunity, not to enforce equality of outcome.

What is being identified as a problem here is in fact evidence that the UK has solved this problem.

After all, it's hardly controversial to suggest that there's a certain gender division in desired child care arrangements in a mammalian species, is it? The aim and purpose of public policy should thus be to maximise the expression of that choice: precisely what the UK system does offer.

Time for a 40% top rate


Lord Lawson has called for George Osborne to lower the top rate of income tax to 40% in his July budget.  It is a timely call that echoes former times.  When Nigel Lawson, as he then was, was preparing his 1988 budget, the ASI published research showing that if he lowered the top rate from 60% to 40%, the Treasury would soon gain revenue, even though the government share would be smaller in relative terms, and the burden on business would be lighter.  

Chancellor Lawson did just that, lowering the top rate to 40% and the starting rate from 29% down to 25%.  This was his trademark tax simplification.  From a myriad of rates and thresholds he now had reduced income tax to only two rates.

Not only did Treasury revenue increase as predicted, but the richest 10% ended up paying a higher share of the total.  From just over a third, their share rose to just under half of the total.  Again, this was what research had forecast would happen.  By contrast, when Labour reneged on its election promise and raised to top rate to 50%, official figures show that it raised nothing like the £2.9bn glibly forecast by Alistair Darling.  And when the coalition lowered it back to 45%, the tax loss was estimated at only £100m.

To cover the political charge of lowering tax for top-rate payers while cutting the welfare bill, Mr Osborne might try a new tactic.  He should lower the top rate from 45% to 40% on a two-year trial basis.  If after that time two results had not been achieved, he should promise to revisit it.

The two results required would be:

1. That the revenue raised from income tax was now higher than it was from a top rate of 45%, or about to become so, and

2.  That the proportion of income tax paid by the top 1%, the top 5% and the top 10% of earners was now higher, or about to become so, than it had been under a top rate of 45%.

Lord Lawson is completely right.  Lowering the top rate to 40% would make Britain a more attractive place to do business.  It would attract talent and investment to boost our economy.  It would achieve growth at no cost to the Exchequer, and it would create jobs.  More to the point, it would send a signal to the world that the UK was once again achievement oriented.  Mr Osborne should be brave.

But why is private property not allowed to leave the country, even if it is a Cezanne?


We find this all most odd: An important Cézanne landscape view of the Mediterranean, which has been on public view in Cambridge for nearly 30 years, is in danger of leaving the UK unless more than £13.5m can be raised.

The British government on Monday placed a temporary export bar on Cézanne’s Vue sur L’Estaque et le Château d’If.

Purchased by the industrialist Samuel Courtauld in 1936 and passed down through his family, it was on long-term loan to the Fitzwilliam Museum from 1985 until last year when a decision was taken to sell it.

What justification is there for whoever owns this painting now not being allowed to take their private property where they wish?

After all, consider the peregrinations of the painting so far:

Provenance Ambroise Vollard, Paris, by whom acquired directly from the artist. Baron Denys Cochin, Paris, by 1904. Galerie Durand-Ruel, Paris, by whom acquired on 12 May 1905. Paul Cassirer, Berlin, by whom acquired on 21 September 1905. Galerie Bernheim-Jeune, Paris, and Jos Hessel, Paris, by whom acquired on 2 April 1909. Jos Hessel, Paris, by whom acquired on 12 July 1910. Galerie Bernheim-Jeune, Paris, by whom acquired on 12 October 1912. Walther Halvorsen, Oslo, by whom acquired on 21 April 1915. Erich Goeritz, Luxembourg, by 1936. Galerie Thannhauser, Lucerne, by whom acquired from the above on 9 July 1936. Wildenstein Galleries, Paris & London, by whom acquired from the above on 11 July 1936. Samuel Courtauld, London, by whom acquired from the above in November 1936, and thence by succession to the current owners.

What is there in all that which justifies the full majesty of the law being applied to keeping it in the UK?

Our general reading of such export bans is that they are a scam perpetrated upon the general public. Some small number of influential people rather like looking at the occasional French painting. But they'd prefer not to have to pay for their pleasures. Thus they manipulate the law so as to insist that their desires are catered to.

It's time for us to change this system: ban export bans now!