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"Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice" - Adam Smith

Hurrah! There are fewer poor people than we thought

Written by Tim Worstall | Friday 28 February 2014

Not all that many people are aware of quite how appallingly bad most economics statistics are. Not in the sense of it's terrible that the numbers are as they are, but that the numbers are generally so shoddily lashed together. And this is obviously going to be even more true in hte poorer parts of the world. A government that hasn't quite worked out how to collect the rubbish isn't going to be all that good at counting the people nor what they do or earn.

The upshot of this is that we really don't know how many poor people there are out there. We know there are fewer than there used to be, and the poor are a very much smaller portion of the growing population than used to be true, but we really only know trends rather than actual numbers. Basically because the numbers we've got for things like GDP and inequality are so sketchy themselves.

So, enter another method of trying to measure things. What's one of the first things someone will do when they've finally got a couple of annas to rub together? Get in an electric light bulb, So, let us measure the amount of light that we can see from space and we can have a good stab at working out whither poverty. Which is exactly what this paper does:

Finally, we use the new optimal measure of true income to calculate the evolution of poverty at the worldwide level as well as at the regional level. Given that our optimal measure gives a small weight to survey means, our optimal estimates of poverty rates tend to be closer to those reported in the research that uses GDP as the anchor. Under our procedure, developing world poverty declines from 11.8% in 1992 to 6.1% in 2005 and 4.5% in 2010, much lower than the path constructed by giving a weight of 1 to the surveys, which entails poverty falling from 42% to 20.5% between 1992 and 2010. We run a battery of robustness checks on our findings; under the ones most favourable to replicating the survey-based results, the largest that we find developing world poverty to be in 2010 is 12%.

Excellent, things are better than we thought they were.

It's worth making on other point about the differences in these methods of measurement. There are those who insist that those developing economies need to be planned. The smack of firm government must guide their economy. But as we can see, the governments don't actually have the information they would need to be able to plan, even if this were desirable. So it's a doubly bad idea.

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Ukraine and the all-or-nothing EU

Written by Dr. Eamonn Butler | Thursday 27 February 2014

The trouble with EU membership is that it is such a big deal. A country that wants to be part of the club, and enjoy its free trade benefits also has to accept a mountain of regulation and to sign up for the common currency. It is all or nothing.

That puts countries like Ukraine in a fix, just as it put the UK in a bit of a fix in the early 1970s. The UK did not want to raise tariff barriers and lose its trading relationships with its historic trading partners such as Canada, Australia and New Zealand, from which it imported a great many agricultural products – butter, lamb, fruit, bacon and much else. But thanks to the Common Agricultural Policy, it did not have much choice. Today, the UK is inside the EU's tariff wall, which makes trade with the rest of the world more expensive, and naturally focuses UK trade on Europe.

Ukraine would undoubtedly gain from closer trading links with the EU, but the all-or-nothing nature of the deal would mean that the country's links to Russia and other non-EU countries would suffer, just as the UK's Commonwealth links did. And that, of course, is seen as a threat by Ukraine's large Russian-speaking population. And – never mind the political and defence implications, given the EU's close links with NATO – Russia does not want to see its trade with Ukraine cut back, any more than New Zealand did ours. So they see the future direction of Ukraine as a high-stakes game.

As a logical matter, that does not have to be. If the EU allowed Ukraine the same sort of status enjoyed by (neutral) Switzerland, the country would be free to trade with the EU as part of its customs-union club – but would remain free to preserve trading links to other countries as well. It would also be free to retain its currency and its legal and regulatory structure. A free trade pact with the EU that would help grow the Ukrainian economy, without threatening Russia or the Russian-speaking Ukrainians that the country would be wholly swallowed up into a Western political alliance.

Sadly, though it might talk about creating 'closer trading links' with Ukraine, the EU will never offer the country such a free-trade-but-no-politics status. If they did, every EU applicant would be demanding it right away – along with quite the UK and a few other EU Member States who hate all the regulation, currency union and horse-trading.

Which means that as a practical matter, the stakes will remain dangerously high in Ukraine, whatever happens. What a pity we cannot just have free trade without the politics.

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Market competition is how we choose whom to cooperate with

Written by Tim Worstall | Thursday 27 February 2014

Eamonn has alerted me to another one of those books on how cooperation is better than competition. We can all guess how it goes:

But it doesn’t have to be this way. CEOs, scientists, engineers, investors, and inventors around the world are pioneering better ways to create great products, build enduring businesses, and grow relationships. Their secret? Generosity. Trust. Time. Theater. From the cranberry bogs of Massachusetts to the classrooms of Singapore and Finland, from tiny start-ups to global engineering firms and beloved American organizations—like Ocean Spray, Eileen Fisher, Gore, and Boston Scientific—Heffernan discovers ways of living and working that foster creativity, spark innovation, reinforce our social fabric, and feel so much better than winning.

Yep, standard yadda yadda going on there. We'll all do better with a bit of fluffy group hugs rather than dealing in that awful market competition yucky stuff.

What always gets missed here is that we human beings are a both competitive and cooperative species. And if truth be told, we compete in order to be able to cooperate.

Take a base example, one that is understood by anyone who has ever gone out on the pull. The aim is to find someone to cooperate with: in fact, someone to cooperate the heck out of sometime later in the evening. Yet we all know that we're in competition with everyone else who is aiming to achive the same state of blissful cooperation. We're competing both with the others aiming at the same targets as ourselves and also with the desires of those we wish to cooperate with. And as everyone who has ever successfully pulled knows compromises need to be made, demonstrations of fitness for task performed and in general a not all that genteel pavane of ruthless competition takes place as we sort through those who we would like to cooperate with, those who will consent to cooperating with us and weighing up the best deal we can manage in terms of age, size, energy and cuteness. And of course the men are doing the same to the ladies as well.

Outside the world of cheap nightclubs we're all doing much the same thing. If looking for a long term mate we might change our selection criteria (the likelihood of somone saying yes on the first date might decline in importance) but we are all competing with everyone else of the same sexual orientation for those we desire, as they are with their cohort. Similarly, steel companies are competing with each other to sell to car factories, of course they are. But there's a good reason why it's very difficult indeed to dislodge an incumbent supplier: because the buyer has gone through that competition pahse and is now engaged in cooperation.

And that's actually how much of the economy does operate. Almost nobody is constantly on the look out for a new supplier. Most of us are, most of the time, cooperating with those we have already chosen through the competitive part of the process. And you can't really get the system to work in any other manner. We don't want to give up the competition part, that's how you end up living with the girl you went to primary school with, how the E Germans ended up driving Trabants. And we don't want to continually have the competition either for that would mean putting out to tender the purchase of every office pencil or a marriage record like Liz Taylor. We do need both however: it's just that finding the correct balance can be a little difficult as any middle aged man who visits a cheap nightclub can attest.

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Is Ha Joon Chang actually an economist?

Written by Tim Worstall | Wednesday 26 February 2014

At least, is Ha Joon Chang an economist with at least a vague familiarity with finance and public markets? I ask because this piece of his is remarkably naive and ill informed:

According to the stock market, the UK economy is in a boom. Not just any old boom, but a historic one. On 28 October 2013, the FTSE 100 index hit 6,734, breaching the level achieved at the height of the economic boom before the 2008 global financial crisis (that was 6,730, recorded in October 2007). Since then, it has had ups and downs, but on 21 February 2014 the FTSE 100 climbed to a new height of 6,838. At this rate, it may soon surpass the highest ever level reached since the index began in 1984 – that was 6,930, recorded in December 1999, during the heady days of the dotcom bubble.

The current levels of share prices are extraordinary considering the UK economy has not yet recovered the ground lost since the 2008 crash; per capita income in the UK today is still lower than it was in 2007. And let us not forget that share prices back in 2007 were themselves definitely in bubble territory of the first order. The situation is even more worrying in the US. In March 2013, the Standard & Poor 500 stock market index reached the highest ever level, surpassing the 2007 peak (which was higher than the peak during the dotcom boom), despite the fact that the country's per capita income had not yet recovered to its 2007 level. Since then, the index has risen about 20%, although the US per capita income has not increased even by 2% during the same period. This is definitely the biggest stock market bubble in modern history.

Even more extraordinary than the inflated prices is that, unlike in the two previous share price booms, no one is offering a plausible narrative explaining why the evidently unsustainable levels of share prices are actually justified.

I quote at length so that none will think that I am distorting his position.

The problem with this joint statement, that both the UK and US stock markets are grossly over valued relative to the domestic economies is that, well, the US and UK stock markets are not actually reflective of the relative domestic economies. The perceptive will have noted that we are in a period of globalisation in fact:

This optimism is not just because the U.K. economy is showing signs of improvement -- the Office for Budget Responsibility upgraded its forecast for gross domestic product growth in 2013 from 0.6 percent to 1.4 percent -- there is an international aspect to the optimism. After all, 80 percent of earnings by FTSE 100 companies come from overseas, according to Credit Suisse.

And:

S&P 500: 2010 Global Sales, analysis recently released by Howard Silverblatt of Standard and Poor’s, shows that the percentage of sales from S&P 500 companies that report results from foreign operations show that overseas sales grew to an estimated 46 percent in 2010. That number was in the 30 percent range just a decade ago, according to data collected by the Bureau of Economic Analysis.

I don't claim that either of those percentages are wholly accurate nor canonical. Only that somethiing near a majority of S&P 500 earnings come from outside the US and the vast majority of FTSE 100 such from outside the UK. Making a comparison of these indices with the respective domestic economies a truly horrible piece of misvaluation.

For we are indeed in this era of globalisation and that global economy is growing like gangbusters as hundreds of millions, billions, climb up out of that historical peasant destitution. Meaning that the capitalist types are celebrating, according to your preference, either the money that can be exploited out of these newly rich or the money that is being made by aiding them in becoming the newly rich.

Then we come to the truly absurd:

The result, unfortunately, is that stock market bubbles of historic proportion are developing in the US and the UK, the two most important stock markets in the world, threatening to create yet another financial crash. One obvious way of dealing with these bubbles is to take the excessive liquidity that is inflating them out of the system through a combination of tighter monetary policy and better financial regulation against stock market speculation (such as a ban on shorting or restrictions on high-frequency trading).

Blimey. Robert Shiller's just been awarded the Nobel in economics partly for his pointing out that in order to prick a speculative bubble you want people to be able to go short in said asset. Banning shorting makes it only possible to bet long, increasing said bubble.

I would have hoped that an economist at Cambridge would at least be conversant with these two points....

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Unrestrained majoritarianism allows exploitation of minorities

Written by Dr. Eamonn Butler | Tuesday 25 February 2014

A few weeks ago, the Institute for Fiscal Studies pointed out that just 1% of Britain's taxpayers contributed 30% of income tax receipts. A decade ago the top 1% paid 20% of the total – indicating how much of the government's tax burden has been shifted onto higher earners.

But that is just income tax. What about the general burden of taxation, and who it goes to support? You might think that maybe four-fifths of us pay tax in order to support the other, low-earning one-fifth. Not a bit of it. In fact the majority of households in Britain are supported by the minority. Three-fifths of households get more from the state than they contribute. Only two-fifths contribute more than they receive, according to figures from the accountancy group Smith & Williamson.

The group who do best in terms of the difference between what they pay in and what they get out is in fact not the poorest at all. It is remarkable that the lowest-income decile, the tenth of households on lowest earnings (averaging £10,300 before tax) should pay tax at all, but they do – and national insurance, VAT and many other taxes to boot. Add it all up and take it away from the value of the benefits they get from the state, and the net support they get is worth £9,540. But the next decile up, households with an average gross income of £15,500, pocket a net balance of £11,240 in benefits over what they pay in taxes. The decile after that, earning £18,800, also get a better deal than the poorest, with a net balance of £10,240.

You may think it equally remarkable that higher earners should get any benefits from the state at all, but of course they do – think of all that free healthcare and education, child benefits and various subsidies to farms and businesses. In fact, a household in the seventh-highest earning decile, earning an average £38,800, receives benefits from the state of not quite £12,000 while paying taxes of not quite £11,000, making them net contributors of just £1,820. A household in the top earnings decile, on £101,300, would contribute a net £28,410.

So there you have it. Only a minority of the public, the top four deciles, meaning the highest-earning two-fifths of the population, pay more into the state than they get out. The majority, three-fifths, are living at their expense.

This in itself cannot be a healthy situation. Democracy is wonderful, but unrestrained majoritarian politics allows the majority to exploit minorities – and in the field of taxation, that exploitation is easy-peasy and the depth of it can be enormous. As we see today.

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Climate change will cause 22,000 murders apparently

Written by Tim Worstall | Tuesday 25 February 2014

There's an interesting new piece of research that tells us that climate change is going to cause an extra 22,000 murders in the US over the rest of this century.

Between 2010 and 2099, climate change will cause an additional 22,000 murders, 180,000 cases of rape, 1.2 million aggravated assaults, 2.3 million simple assaults, 260,000 robberies, 1.3 million burglaries, 2.2 million cases of larceny, and 580,000 cases of vehicle theft in the United States.

Hey, it's peer reviewed so it must be true, right?

Unfortunately I rather doubt that it is true. Looking at an earlier version of the same paper gives me the reason why.

However, there is no obvious cross-sectional relationship between the temperature zones and crime rates.

So let's just walk through what has been done here. There's a well known connection between temperature and crime rates. Warmer summer evenings lead to more boys out on the stoop with their beers and that mixture of boys and beer does indeed lead to more public crime. Gary Becker has written extensively on this very subject. So, great, we might then assume that if the world gets warmer then there will be more crime: just as we see when temperatures rise today.

However, this is an error: humans don't actually act that way as anyone who has moved from one climactic region to another will know. We adapt very quickly indeed to local conditions. Yes, sure, warm weather for the region leads to more beer stooping. But it is the variation in that local weather that leads to it, not the temperature itself. What might lead to outepils (as the Norwegians put it, outdoor beers,) in Moscow will be a very different temperature from one that will lead to the same in the Algarve as I know from personal experience. A temperature in the latter that will have me in three layers of clothing by the wood fire would in the former have me near naked and worshipping this strange yellow thing in the sky.

It isn't absolute temperature that counts here, it's the variance of temperature in a location. As the paper itself tells us, when it points out that there's no relationship between average temperature in a place and the crime level. It's when things are hotter than normal in a location that crime rises. So, if all temperatures rise over a century then we get the same variance and it is as if everyone has moved south a few tens of miles. And as there's no relationship between moving south a few tens of miles and the crime rate we cannot expect climate change to increase said crime rate.

So, I'm afraid that I think the prediction will fail. Nicely done paper and all that but missing that one crucial point I fear.

And now to be seriously speculative. We here in Central Europe (I've been working all winter just a few hundred miles from the Ukraine) have been having a very warm winter indeed. The jet stream has meant that the weather meant for here has been arriving in the Southern US and vice versa. They get the ice storms and we don't get what we consider to be a proper winter at all. And have a look at the pictures from Maidan Square. There's nary a sign of snow. And there is a good reason why the response of an experienced cop dealing with a riot to the question "What help would you like?" is "A really decent rain or snow storm. Possibly both".

I agree this is indeed very speculative but I do think that Yanukovich would have had a better time of it in a more normal winter.

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An ageing libertarian on drugs

Written by Sam Bowman | Monday 24 February 2014

Over at ConservativeHome I've written a response to Kathy Gyngell's piece that claimed that "ageing libertarians" (!) are pushing drug legalization on unsuspecting youths:

No, “ageing libertarians” are not pushing legalization on abstemious youngsters – in the US, at least, a recent poll found that 67 per cent of under-30s supported legalisation, compared to 58 per cent of the population in general.

No, it is not legitimate to dismiss inconvenient research because it comes from “pro-drugs lobby groups”. Nobody should dismiss Kathy’s arguments simply because she is anti-drugs either. We should all play the ball, not the man.

And no, it’s not good enough to say that drug laws don’t matter because drug use is ‘marginal’ compared to alcohol and tobacco use. In the 12 months ending March 2013, there were around 87,000 convictions for drug offences. If our laws are unjust, then roughly 87,000 people are being wrongly convicted every year. Around 70 per cent of drug offenses relate to cannabis possession.

Read the whole thing.

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I'm not sure I agree with Gregory Clark on social mobility

Written by Tim Worstall | Monday 24 February 2014

Gregory Clark (who you should remember from the excellent "A Farewell to Alms") has some new research out looking at the historic rates of social mobility. A good summation of that is here, in the NY Times. Worth reading that but the short version is that social mobility has been very low across societies and history. The current day is not real change from those historical numbers.

It's not quite clogs to clogs in three generations, more like that in three centuries.

However, while I accept the result that he's found and also think it most interesting, I'm not absolutely sure that it's entirely right. The problem, to my mind, comes from the method he's used to work all of this out.

He looks at surnames, marks out certain surnames at certain points in time as being markers of either upper or lower class, then looks at how those markers change over time. Do formerly lower class names move up into the upper classes? Do upper class names decline in social place? The answer is yes but it takes time, those centuries.

Any number of possible explanations come to mind: family networks, genetics, inheritance of goods and opportunity. But the one thing that I worry about here is that the study of surnames is by definition the study of male lineage. And that strikes me as a problem.

For example, Middleton, under Clark's system, is not going to be recorded as one of those names that made the leap from middle class to royalty. Nor, as has happened in the past, those of the meteoric rise of Amy Lyon or Nell Gwynn. Yes, OK, those are exceptions (and I am not placing the former Ms. Middleton in the same class as the two grande horizontales) but I have a feeling that it's not quite that much of an exception.

I have a feeling, but cannot prove and have no idea how you would prove, that social mobility through marriage is something rather more common in women than it is in men. Thus by looking solely at surnames Clark is underestimating that social mobility. Capturing it accurately for men but perhaps not for women: or rather, capturing it accurately for the descendants of men but not for the descendants of women.

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Of course the Fed knew about the manipulation of LIBOR

Written by Tim Worstall | Sunday 23 February 2014

Some seem surprised that the Fed knew about the manipulation of LIBOR way back. To which I would respond that of course they did. Everyone knew about it.

Or perhaps I should point out that everyone knew about one set of that manipulation, for there were (allegedly) two.

The first was where trading desks would try to get the rate submitters to edge the rate to benefit their positions. This is illegal, people are being and rightly should be punished for having done this. The second was rather different:

The US Federal Reserve knew about Libor rigging three years before the financial scandal exploded but did not take any firm action, documents have revealed. According to newly published transcripts of the central bank’s meetings in the run-up to and immediate aftermath of the collapse of Lehman Brothers, a senior Fed official first flagged the issue at a policy meeting in April 2008. William Dudley expressed fears that banks were being dishonest in the way they were calculating the London interbank offered rate – a global benchmark interest rate used as the basis for trillions of pounds of loans and financial contracts. “There is considerable evidence that the official Libor fixing understates the rates paid by many banks for funding,” he said.

This is where the banks themselves were not reporting the correct rates. To understand this the details of what is going on here. Each bank reports what rate it can borrow at (please note, what would it cost to borrow, not the rate at which it would lend) in a currency for a term. Top and bottom quotes are taken off and the average is then LIBOR for that currency and term. And what was happening in the depth of those dark days in 2008?

Well, if we look at Northern Rock the rate at which they could borrow was infinite: no one would lend to them. Happily, NR wasn't a reporting LIBOR bank, but HBOS might have been, Llloyds definitely was when it ran into trouble and so was RBS. And that first sign of the coming trouble is that people refuse to lend, short term and unsecured, to those troubled banks. So we've two things going on here. If a bank reports the true, troubled, rate at which it can borrow it is then admitting that it is troubled. In itself this causes further trouble of course.

The second thing is that in those dark days the interbank market essentially froze solid. No one could borrow in size at all: that's why all such borrowings were routed through the BoE.

All of which means that if the banks had been reporting LIBOR properly then rates would have been somewhere between 20% or so and infinity. Which really isn't somehting that any central banker would want to have reported. And the fact that they weren't being so reported was also known to every central banker. Yes, even to the Fed.

 

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As I've been saying for some time now, measurement is important

Written by Tim Worstall | Saturday 22 February 2014

As above, I've been shouting for some time now that measurement is an important problem in our economy. More specifically, many of the things that we are told are problems seem to fade away once we actually measure what is going on properly. For example, the gender pay gap, when we rummage through the numbers, turns out to be actually a motherhood pay gap. Perhaps this is still a problem but it's most certainly a very different one from simple discrimination upon the grounds of gender. We're told that health inequality in this country is down to income inequality: and those presenting the measurements entirely refuse to acknowledge that it is more complex, for health inequality itself can lead to income inequality. Similarly, we're told that income inequality in the UK is absurdly high: without anyone being willing to adjust for the different cost of living in different parts of the country and thus measure the only thing we might even possibly care about, consumption inequality.

The details of what we measure and how matter deeply. Which is what makes this little broadside from The Economist so interesting:

BRITISH businesses have always underinvested, haven’t they? Experts from Michael Porter to Michael Heseltine to Will Hutton all agree. The idea is so old and so widespread as to be received wisdom.

Seeing Will Hutton described as an expert is painful but yes, they do all say that.

But is this truism really true? Over the last decade, researchers have gradually reached a surprising conclusion: when you take into account intangible investments, such as software development, product design and training, British businesses aren’t investment laggards after all.

OK, that is interesting.

The UK turns out to be one of the leading investors in non-R&D intangible assets: things like product and service design, organisational investment and branding and marketing. This is perhaps unsurprising given the size of its services sectors: service industries typically invest more in other intangibles than on physical capital or R&D.

And while that is also interesting it is not, as they say, surprising.

So let us strip this back to basics. The country with perhaps the largest services sector of any economy anywhere (absent various microstates) invests more in the sort of intangibles that services require and less in the sorts of tangibles that not-services require. We don't need to even consider cause and effect here to see that this is a pretty trite observation.

Which brings us to a non-trite one. Those very people (Heseltine and Hutton especially) who insist that we must indeed plan our economy, with the aid of both accurate information and the wisdom of their good selves, are entirely ignorant of this important fact. The UK does not invest less in business than other countries do. Rather, it invests in a manner consistent with the industrial base that it has.

Which brings me back to measurement being important. If those who would manage us are ignorant of the facts then we're not going to be well managed, are we?

Or, as we might put it, Will Hutton just ain't an expert, is he?

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