The Pin Factory Blog

Today sees the launch of the Adam Smith Institute's latest report, Plain packaging: Commercial expression, anti-smoking extremism and the risks of hyper-regulation. Its author, Christopher Snowdon, is the author of books including The Spirit Level Delusion, Velvet Glove, Iron Fist, and The Art of Supression. We reproduce the report's executive summary in this post, but the whole report is available to download for free here:

1. The UK government is considering the policy of ‘plain packaging’ for tobacco products. If such a law is passed, all cigarettes, cigars and smokeless tobacco will be sold in generic packs without branding or trademarks. All packs will be the same size and colour (to be decided by the government) and the only permitted images will be large graphic warnings, such as photos of tumours and corpses. Consumers will be able to distinguish between products only by the brand name, which will appear in a small, standardised font.

2. As plain packaging has yet to be tried anywhere in the world, there is no solid evidence of its efficacy or unintended consequences.

3. Focus groups and opinion polls have repeatedly shown that the public does not believe that plain packaging will stop people smoking. Even ardent antismoking campaigners do not make such a claim. Instead, activists assert that nonsmokers take up the habit as a result of seeing “glitzy” tobacco packaging. This claim lacks plausibility and is bereft of empirical evidence.

4. One in nine cigarettes smoked around the world is counterfeit or smuggled. The illicit market lowers prices, fuels underage consumption, deprives the treasury of tax revenue and makes an unhealthy habit still more hazardous. It is hard to think of a policy that could delight counterfeiters more than standardising the design, shape and colour of cigarette packs.

5. The wholesale confiscation of an industry’s brands and trademarks represents an unprecedented assault on commercial expression. It not only tramples on the principles of a free market, but it may also be illegal. Expert opinion, including that of the European Communities Trade Mark Association, the British Brands Group and the International Trademark Association, says that plain packaging is an infringement of intellectual property rights and a violation of international free trade agreements to which the UK is a signatory.

6. Anti-smoking lobbyists claim that plain packaging will not be imposed on other industries in the future, but this is a hollow reassurance in the light of the accelerating war on alcohol, sugar, salt and fat. What happens to tobacco tends to happen to other products sooner or later. Public health organisations around the world have been applying the blueprint of antitobacco regulation to other products for years. Sin taxes and advertising bans are increasingly common for certain types of food and drink, and various campaigners have called for graphic warnings to be placed on bottles of alcohol. It should be no surprise that in Australia, where a plain packaging law was passed in 2011, activists are already demanding that ‘junk food’ be sold in generic packaging. Australian anti-smoking lobbyists, meanwhile, say that the next step after plain packaging is to force the tobacco industry to make cigarettes “foul-tasting”.

7. Plain packaging is not a health policy is any recognisable sense. It neither informs nor educates. On the contrary, it limits information and restricts choice. It will serve only to inconvenience retailers, stigmatise consumers and encourage counterfeiters. Wholesale expropriation of private property to make way for public propaganda represents an unacceptable intrusion into an already over-regulated marketplace which will set a dangerous precedent for other products.

Read this report

Madsen takes on speculators this week. Or, rather, people who object to speculators. As Madsen explains, when you think about what speculators do on an individual level, they seem rather reasonable — and, indeed, valuable to the rest of us. Speculators are a form of insurers. They don't gamble any more than your car insurer does, but they absorb risk so you don't have to worry about it. It's all a form of specialization and trade.

You can watch the rest of Madsen's videos here, and be sure to subscribe to our channel too.

There's actually a fairly simple answer to that question: we don't care. Seriously, we care not a jot nor tittle, nor anything earthier and more Anglo Saxon, about the survival or not of the music business in this digital age. Just as if we're thinking straight we don't care at all about the health of any business ever.

For we don't in fact care about the profits of business, the health of business. We care only about the ability of consumers to consume.

Now it's undoubtedly true that digital copying, the internet, bit torrents etc have reduced the ability of the record companies (and to whatever extent they ever got any of it, the musicians) to monetise their products. But that's not what we actually care about, what we want to know is whether we the consumers have been able to consume more music as a result. Which clearly we have.

We need to go a little deeper though. Such things as copyright protection are not there to aid producers: they're to aid consumers again. For we recognise that a limited property right in new creations encourages such new creations. Thus, such property rights increase the number of new creations that can be consumed. And yes, that really is the reason why we have the whole structure of intellectual property. Nothing at all to do with just rewards, all entirely to do with incentives to allow consumption.

So what we'd really like to know is whether there has been a decrease in new composition in recent years, perhaps even a reduction in the quality of those new compositions, as a result of digital copying. It's a slightly difficult thing to test that as by definition any music written after the listener passed 21 is rubbish to said listener and anything published after they're 30 is simply noise. That's actually one of the points of pop music, to differentiate between the young and the old.

However, using a set of techniques, each independent but each of which provide roughly the same answer, Joel Waldfogel has been able to show that there has not been a decline in quality since Napster spearheaded the don't pay a red penny for music thing.

The answer is, as he says, that while monetisation of what is created has become more difficult, the very same digital revolution has lowered the cost of creation. Given that the incentive to create is not the income from having done so, but the net income, the incentives to create still work.

Thus, given that what we actually care about is consumption ability, we don't have to worry overmuch about the business models of the music recorders and distributors. At least not at present. For we're getting to consume a similar amount of high quality new creations but paying less for being able to do so.

That is, the consumers are getting better off and as for the producers, well, we only care about them to the extent that consumers are getting better off. Or as in this case, we don't care about them at all.

This shale gas thing: drill or not drill? There are reasonable arguments all around the question and the final answer will depend slightly upon what you think particularly important and mostly on how strong or important each of the arguments are.

On the one side we've the various economic arguments: lots of cheap gas right here at home would be a nice thing to have. Keeping the lights and the heating on on those cold winter days when there's no wind would be nice too. On the other hand we've all those environmental arguments. Will we be polluting the groundwater? What about earthquakes?

Now it is possible for each of us to try and wade through each and every of these different arguments and try to come to some sort of conclusion. Or we could make use of those nice people called scientists to wade through them all for us. We'd need to read and consider their conclusions, sure, but we don't have to do all the digging ourselves.

And we're in luck for here is just such a report. OK, so it's about the US but the gas is the same, the basic geology is the same and the techniques are all the same. The conclusion is that yes, of course, there are possible environmental dangers. But given that they're easily controllable by basic safety measures we should get on with the drill baby drill bit.

The benefits of large amounts of locally available and relatively low carbon, and above all cheap, energy are simply so much higher than the risks that it's pretty much a no brainer.

And we in the UK have a further consideration of course. If it all goes wrong in the test case, well, it's only Lancashire, isn't it?

The rise of global capitalism since 1980 has been the central factor in the massive rise in global quality of life. In this article, Jacob Lundberg explains why more liberalized global markets have meant richer and freer people.

When she was young, Maria Vargas moved from the countryside in northern Brazil to Sacadura Cabral, a poor suburb (favela) of São Paolo. (Melo, 2002) She worked as a maid and in the textiles industry, but was injured and had to provide for herself and her seven children – one of whom died as a four-year-old – by sewing after the death of her husband.  Maria is only one of the many faces of poverty.

But poverty is decreasing and the world is gradually becoming a better place to live in: health is improving, school enrolment is increasing and democracy is on the rise. Many people seem to be unaware of this fact. An important reason for the progress that is taking place is the fact that during the last decades of the 20th century, there was a movement towards liberalization and globalization almost everywhere.

World trade has become considerably freer over time – the median global tariff rate has decreased from 26 percent to 9 percent since 1980. (Gwartney & Lawson, 2009) Today, 80 percent of developing countries’ exports to industrialized countries do not face any tariffs, up from 54 percent in 1998. (UN, 2010, p. 68) Government intervention in agriculture has become less pervasive. An obvious case is China, where agricultural output has increased considerably since liberalization.

Read this article

BBC News reported today that newly de-classified files from 1945 reveal that MI5 concluded that a Nazi counterfeit currency programme which increased the amount of British Pound notes in circulation by 10% during World War II had achieved the Nazi’s goal of “destroying confidence abroad in Bank of England notes”. 
 
By contrast, during the 3.5 years since September 2008, the Bank of England has increased the amount of British Pound notes in circulation by 28% and increased the total UK money supply by a factor of 3.34 times!  Has this also had the effect of “destroying confidence abroad in Bank of England notes”?  Well, the fact that the British Pound has lost almost 60% of its value relative to the price of gold since September 2008 might be a clue.

Workfare — the policy of tying benefits to work programmes — has come under scrutiny this week as an unpaid position at Tesco was advertised in a workfare programme. The position was originally advertised as being permanent (which Tesco says was a human error), causing some to accuse Tesco of using "slave labour". Of course, this is silly hyperbole — real slaves didn't have a choice. But even so, I'm deeply sceptical about the concept of workfare. It strikes me as a tenth-best approach to welfare reform, and may even be worse than the status quo.

Government interventions in the market should aim to distort things as little as possible. Government is short-sighted, bad at handling information, and subject to incentives that rarely line up with those of the public at large. And workfare has the potential to be massively distortional. By requiring government officials to decide which jobs are worthwhile and which aren't, workfare acts as a form of central planning of the labour market.

It's extremely unlikely that governments know better than individuals what is best for those individuals. Yet workfare assumes exactly that. Assuming that people on benefits are too stupid to make decisions for themselves is a Victorian-style paternalism that also underlies the health fascism of minimum alcohol pricing and plain cigarette packaging laws.

The mistake behind workfare is to assume that everybody who is unemployed is idle. Yes, some are. But many are either looking for work, or reskilling to work in jobs that require new skills.

An example might be of a computer programmer who is an expert in the Java programming language. Suppose some new advancement means that her Java skills are no longer in demand on the market. A good path for her might be to teach herself a new language, to build on her existing skills and eventually find a new, skilled job. This would be vastly better for her and the rest of us than if she ended up working an unskilled job flipping burgers at McDonald's. But it is very possible that workfare would do the latter, failing to distinguish between our actively unemployed programmer, and the idle unemployed people it is aimed at.

Some of workfare's supporters point to provisions it makes for retraining, but this is naive and simplistic. Retraining is basically a form of individual entrepreneurship — trying to anticipate unfulfilled demand in the labour market and meet it with new services. It is a highly individualistic activity that is difficult to categorize and is contingent on each person's interests, skills and experience. The government can't direct it with any hope of success; when it tries to it will inevitably get things wrong. The overall effects may be that workfare pushes potentially skilled workers into unskilled jobs, and mangles the market signals that the unemployed would otherwise be responding to.

There's something deeply unpleasant about the government-corporate relationship that workfare is based on. Firms have to be approved by the government to qualify for the scheme, and as usual it's large, established businesses that can navigate (and maybe manipulate) the state's rules most effectively. Workfare isn't slavery, but I'm not happy with a system that predominantly supplies privileged businesses with artificially cheap labour, paid for by the state.

The empirical evidence isn't encouraging either. A 2008 report by the Department for Work and Pensions found that "there is little evidence that workfare increases the likelihood of finding work" (h/t Daniel Sage). Workfare's supporters point to Wisconsin's "Wisconsin Works" programme, which did reduce long-term unemployment when it was introduced in the 1990s. But, in the first big recession since its introduction, Wisconsin's unemployment rate has been roughly in line with the national average, and is unremarkable when compared with similar US states:

But there is a problem with long-term unemployment in Britain and, even if workfare won't help, the status quo isn't much better. No wonder unemployment is so bad — minimum wage laws effectively ban unskilled (read: low paid) jobs. That means that people cannot get on-the-job training and skills unless they take unpaid internships or work experience. The bizarre result of the minimum wage is that Tesco can hire people for £6.08 an hour, or £0.00 an hour, but nothing in between. Combined with the fact that working means you have to forgo benefits that may be worth more than your wage, it's hard to think of policies that could make long-term unemployment more attractive.

There is a solution that could appeal to a broad base of people and fix most of the broken incentives that unemployed people face:

1) Abolish the National Minimum Wage so that unskilled jobs can be created. This will allow more "first foot on the ladder" jobs to be created and give unskilled people a way out of unemployment.

2) Replace benefits with a tapering income subsidy, similar to the government's Universal Credit, which would supplement the incomes of people on low wages. This should be generous, to persuade some supporters of the minimum wage (who, wrongly, think that it creates some kind of minimum living standard for people) to accept abolition of the minimum wage.

3) Reduce the income subsidy over time — say, a year — so that the initial safety net provides security to people who have been recently made unemployed but does not allow for long-term dependency on welfare. 

Workfare is a misguided, statist attempt to fix a problem made by government. By adding even more planning and state control to people's lives, it will end up causing more problems than it solves. Unemployment can be addressed, but only by removing government barriers to work, not by adding on more layers of state involvement in people's lives.

Project Merlin – the idea that the UK Treasury can centrally plan the amount of credit needed in the real economy – was a predestined failure.

Recent data released by the Bank of England was disappointing for the UK SMEs. The lending target fell short by £1bn, even though total lending did rise to overshoot its target by £25bn. The banks claim they did their job as required, while accusing the sluggish economic recovery and poor demand for credit from small businesses as the reason behind lower SME loans. On the other hand, SMEs blame high credit costs and unfavourable loan terms, calling for more competition between the banks to offer better products and lending models.

The reaction from both sides, the banks and the businesses, was as expected, proving once again the short-sightedness of politicians. Banks don’t want to loan to risky borrowers fearing new potential losses they are unwilling to accept. Businesses realize this and want more competition as the only possible way to lower the costs of credit.

However, with ideas such as credit targets the government is doing the opposite – it is undermining any possibility for more competition. When you set an artificial target applying to only the 5 largest banks, those banks will strive to meet the targets by increasing their dominance and taking a larger share of the market than usual. The result is that 5 biggest banks accounted for 90% of all SME lending last year. 

The end result of the target was political pressure on banks to increase lending, no matter how and to whom, meaning that the banks channelled funds not guided by commercial incentives or market signals, but by the bulk of funds needed to be deployed to satisfy the central authority. This resulted in a huge misappropriation of resources where money, instead of flowing to projects where it might generate new value and growth for the economy, is artificially drawn to various projects simply to fulfil the given target.

Besides, how is the government supposed to determine the threshold of credit big enough to start up the recovery? Even if such a threshold existed, a target to reach it means the government can only influence the supply of credit, not its demand, which is what the results have showed. In addition, having credit targets, whether achieved through bank lending or by the Treasury itself (via credit easing) the ultimate effect will be dependency on government transfers and credit flowing only to politically selected companies, instead of those who could actually use the funds to create value.

Targeting a mandatory level of spending, savings or credit always reminds me of the misguided EU policy on mandatory expenditures on R&D in the IT industry to 3% of the GDP for every EU member (this was a goal of the 2000 Lisbon Treaty for 2010). Not surprisingly many of the countries fell short of the 3% target, and have tried to artificially move closer to it, by dumping huge amounts of money into R&D only to satisfy the target. Needless to say this yielded poor results and almost no substantial technological innovation or progress (these results were evident before the crisis even started). R&D is proven to have positive effects on technological advancement and economic growth, but when it’s promoted by subsidies and investment interventions, the market gets distorted by receiving wrong signals of what is a good investment and what innovation is most likely to deliver growth.

One can go a step further and compare this sort of reasoning to the Soviet Union planned targets for its heavy industry. Both are based on the same principal; that politicians and bureaucrats believe they are better qualified than individual businesses to make decisions on how much money should be invested in a particular industry. Just as the Soviet Union and the EU planning failed to create a competitive and a dynamic economy, so has the Merlin Project in the UK. And this wasn’t a policy enforced by the EU – it was a product of domestic thinking.

You don’t solve a problem in the economy by pumping taxpayers’ money into banks, technology or manufacturing, you do it by enabling a fair and competitive environment where successful firms triumph, while unsuccessful and those unable to adapt are forced to closed down. There is nothing more fair than the system of meritocracy. In a market economy it is a travesty to have private sector decisions and strategies be guided by politics.

Thankfully, Merlin won’t be repeated this year, but Mr Osborne is instead negotiating a new £20bn loan guarantee scheme with the banks in order to support his credit easing policy. What he doesn’t realize is that although this may provide a temporary short-term relief, it will have deeper consequences by creating dependency of the businesses on government transfers. In addition, it is very difficult to make a temporary policy work effectively, particularly when future expectations may undermine its temporary desired effects. The problem is always what happens when the government ceases its lending scheme.

A decrease of regulatory constraints and taxes will level the playing field for all businesses, making sure that competition gives rise to successful and adaptable companies. A much better way than a stimulus in any form of ‘easing’, is to lower costs for the SMEs.

Finally, can someone tell me what type of economic policy requires huge spending and stimuli from the government to the real economy in times of crisis? Is it called austerity? 

Steven Landsburg, better known as the Armchair Economist, is one of the closest things the economics world has to a rock star. His book was one of the first of the series of pop economics books like Freakonomics - and one of the best at that.

I'm delighted to say that he'll be speaking at the Adam Smith Institute next Monday, on his new book "More Sex is Safer Sex and Other Surprises From Economics". You can see the event details here — it's free and open to everyone, so do come along if you can. Please RSVP so we know you're coming, and let your friends know — they'll never forgive you if you don't!

Older readers will recall two major initiatives for less regulation and deregulation.  In 2007 the EU created an “Action programme” to reduce the administrative burden of regulations by 25%.  In the event, they claimed to have reduced the €126bn p.a. by 31%.  Unfortunately they did not take into account the new regulations since 2006 and furthermore the 31%, even if correct, was not passed along to EU businesses.  UK businesses have certainly not seen any benefit from this EU Action programme.

The UK Regulatory Policy Committee (RPC), together with their opposite numbers in the Netherlands, Sweden and Germany, published a report in November 2011 welcoming the progress so far but noted that the EU Action programme was due to finish in 2012 and there were no signs of any follow up, or indeed any, action.

In the UK, the RPC reviewed the Impact Assessments (IAs) of 278 new regulations (no slowing down there) in the first half of 2011 and found that IAs were improving in quality in the sense that the 40% of  IAs “not fit for purpose” previously was down to 31%.  All that shows, of course, is that Whitehall is getting less bad at justifying new regulations.  The RPC has no power to slow regulation down, still less to reduce regulation.  All they can do is to criticise the process.

In previous publications, colleagues and I have shown that the responsibility lies with Parliament.  MPs have the power to block regulation and to deregulate.  They just do not use it.  They have been, in short, asleep at the wheel. The Commons European Scrutiny Committee in particular is tremendously busy shuffling EU paper but do nothing to ensure that new EU regulation is worthwhile.  Their latest annual report, published in January, pointed to four EU policy matters that they recommended for Parliamentary debate: Trans-European Networks: integrated EU infrastructures,  Safety of offshore oil and gas activities, Financial services: credit rating agencies and Economic governance.  All topics worthy of wider discussion, no doubt, but nothing the Commission would need to worry about.

The bottom line is that the Coalition has lost the regulatory fox.  The most extraordinary aspect of all this is that the Government has run short of new primary legislation to run through Parliament and MPs are complaining that they have little to do.  The NHS and welfare payments are attracting great attention, notably in the Lords, but there is not much happening in the Commons.

Maybe this would be a good opportunity to challenge new EU and UK regulations and to simplify the existing mountain of impediments to doing business.  If we are to get out of our economic difficulties, business, and especially small and medium enterprises need their help.