Economic Nonsense: 33. Things like healthcare and education are too important to be privately provided

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Healthcare and education are not only important; they are vital.  Most of us would prefer to live in a society that so organized itself that these services were accessible to all its citizens.  This is not, however, the same as saying that they should be produced and delivered by the state.  

When the state goes into the mass production of services it tends to put them into the political domain, where they can be influenced by ideological or interest groups.  Politicians can manipulate them to secure electoral advantage.  They can be effectively captured by producer groups such as teachers' or healthcare workers' unions, to the detriment the citizens who consume them and the taxpayers who fund them.

When the state does mass-produce services, they tend to be standardized.  It is easier to have a one-size-fits-all output than one that caters for individual preferences and allows a variety of choices.  The private sector, by contrast, tends to find different niches being filled by a variety of producers, allowing consumers to choose the level and quality that suits them.

The state can fund education without producing it by giving people vouchers to cover the education of their child, or by routing the funding to the school of their choice, as is done in Sweden.  This leaves the schools independent and in control of the education they offer.  Healthcare can similarly be financed through insurance or refunds, without the state having to own hospitals and employ nurses.  Again, countries that do this tend to have more variety and choice.

Education in state-run comprehensive schools is not very good.  There are some good ones, but a great number that fail their parents and children by leaving them ill-equipped for life.  Healthcare in state-run hospitals varies hugely in quality, with recurrent exposés of inadequate care or neglect. 

Funding for state-produced schooling and healthcare depends on what politicians think taxpayers will tolerate.  Their output does not depend on what customers want.  Far from being too important to be privately provided, healthcare and education are too important to be publicly provided.

Battle against the union blob

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It is not surprising that teaching unions are objecting to the proposed 2% pay rise for England’s top teachers. Unions have long protested against performance-based pay for teachers and now they pose another barrier to the School Teachers Review Body. In the STRB's latest submission (pdfto the government, highlighted is the need for a wages increase to encourage the desired competition in the teaching profession.

Arguments against pay incentives are that they encourage ‘teaching to the test’ and orchestrated cheating by teachers and schools. Performance gains are accepted to exist but said to be short-lived. While the long-term benefits, they say, are non-existent and there may even be damage done in the long-run.

But the latest research examining their impact on pupils demonstrates the opposite as being true. Pay for performance schemes are becoming increasingly implemented and contemplated in many developed and developing countries and have re-emerged at the top of the policy agenda in the U.S. They are not just a brilliant way of distinguishing the strivers from the shirkers in schooling systems. Such schemes are reaping good long-term labour market outcomes, too.

Research (pdf) published last month by Victor Lavy looks at a study conducted a decade and a half ago in Israel to determine if there are improvements to future education enrolment, earnings and probability of claiming unemployment benefits. 

The study is the first of its kind to follow students from high-school to adulthood to examine the impact of a teachers’ pay for performance scheme on long-run life outcomes. It found:

A decade after the end of the intervention, treated students are 4.3 percentage points more likely to enrol in a university and to complete an additional 0.17 years of university schooling, a 60 percent increase relative to the control group mean. The road to higher university enrolment and completed years of schooling was paved by the overall improvement in high school matriculation outcomes due to the teachers’ intervention.

So merit-based pay actually improves students' lifetime well-being, judging by school attainment, annual earnings and welfare-dependency, as well as recognising the hardworking, high-flying teachers and making it a more attractive profession.

If we could achieve a similar flexibility in what the best teachers can be paid in the UK, like proposed in the STRB's report, it would mitigate the pressures being faced by schools experiencing increasingly competitive graduate labour markets, tightening budgets and demographics driving up pupil numbers.

A difficulty in recruiting NQTs and experienced classroom teachers in this country has been identified by head teacher unions. A key cause being that salary progression is faster for able graduates in other professions, with the opportunity to reach higher levels of earning as their careers progress, than for the teaching profession.

Ideologically-driven unions are the main enemy of change as they still make it difficult to get rid of timeserving teachers and are hostile to the ambitious reformers in schools and policy-making. It is time to start thinking about the market value of teachers’ talents and penetrate the dogmatic ‘blob’ that the old hat education establishment represents.

There's gold in them thar sewage plants!

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Quite the little story as it seems that the good old British sewage system could be a source of all sorts of lovely metals:

Although the prospect of digging through human excrement hunting for the gleam of gold may seem unpalatable, the figures show it could be a surprisingly lucrative enterprise.

An eight year study by the US Geological Survey found that levels of precious metals in faeces was comparable with those found in some commercial mines.

In fact, mining all of Britain’s excretions could produce waste metals which are worth around £510 million a year.

All most interesting and proof that where there's muck there's brass. However, as usual in these sorts of things, that's not quite the whole story.

In the minerals and mining world the crucial distinction is between dirt and ore. Dirt is, well, you know, dirt. It's made up, like all dirt is, of different elements. Sometimes, and here's the crucial definitional difference, that mixture of elements is sufficiently lopsided in favour of one of more elements that it is commercially viable to process it. That makes it ore: dirt is not commercially viable to process, ore is.

So, as an example, the North Sea contains some trillions of pounds worth of gold. And, last time anyone ran the numbers, it would cost some tens of trillions to process the North Sea. The North Sea is therefore dirt, not ore. And so it is with our human sewage. Yes, there would be a revenue stream from processing the metals out. And the cost of doing this would be higher than the revenue.

Meaning that sewage is in fact dirt. Which is roughly where we came in, isn't it?

Economic Nonsense: 32. Economies of scale mean that bigger is better

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It can be true up to a point that bigger is better, and there can be economies of scale. It does vary, however, depending on the type of activity. In manufacturing, for example, larger orders for components or raw materials can yield bigger discounts. In service industries, however, bigger might mean less personal and therefore less attractive to customers. It is simply not true that bigger necessarily means better. Several different studies have put an upper limit of about 150 employees as the optimum size. Above that level relationships become more difficult and absenteeism can rise while productivity can fall. It is noticeable that some large organizations split themselves into smaller, semi-autonomous units in order to keep each one inside the threshold of manageability.

New firms are constantly entering the market and nearly always start small. Many succeed by taking business away from larger, more established firms that are slower to respond to changing tastes and needs and changing market conditions. Small firms create the overwhelming majority of new jobs in the UK. Small tends to be more adaptable, more nimble, and quicker to change. When firms grow large they can grow complacent, even sclerotic, with a bureaucracy that finds it difficult to change course. In larger units people often find it more difficult to relate to each other and to co-operate effectively.

If bigger necessarily meant better, firms would continue to grow. This does not tend to happen in practice. They expand to a size they feel comfortable with.

It has been claimed that large public industries and services, such as Britain's National Health Service, are literally too big to manage and would operate more efficiently if they were broken into smaller, more easily managed units. Experience suggests that schools have better results if their size is measured in hundreds rather than thousands.

While there can be economies of scale when a new firm is growing, there does seem to be a point after which diseconomies of scale outweigh the advantages of size.

Quantitative easing isn't a distortion

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Dr. Bill Woolsey—previously the mayor of James Island, South Carolina, but also a lieutenant-colonel in the US Army, Associate Professor of Economics at The Citadel military training school, and market monetarist/free banking blogger of much repute—is one of my favourite economists. He has a unique way of explaining economic concepts in tightly logical and crystal clear fashion and couples it with a civil, friendly tone. His second-last post—Are Open Market Operations Distortionary?—is a classic example. If there is a central bank, he argues, responding to rises in money demand by creating new money through 'open market operations' (buying govt bonds with newly-created money) is not distortionary. Indeed, it would be distortionary not to respond.

Many of my fellow free bankers agree that when banks accommodate changes in the demand to hold their monetary liabilities, the result is equilibrating and nondistortionary.   However, they believe that when a central bank adjusts the quantity of base money to accommodate changes in the demand for it, there is something problematic with the process.   The injection of base money is somehow distortionary.

Now, I don't want to claim that this could never be a problem.   The Fed's policy since 2008 has most certainly become very distortionary--intentionally   Perhaps there should be no surprise that the Fed has attempted to funnel money into housing.    Using government interventions of one sort or another to promote home ownership has been the norm for  nearly a century now.

I will surely grant that the potential for a central bank to create an excess supply of money is much greater than that of private banks issuing any sort of money. My point is simply that to the degree a central bank limits its issue of new money to the amount demanded, there is nothing especially distorting about the process.   It is coordinating.

The proper comparison is not what would happen if the nominal quantity of money remained fixed and there was a deflation of prices and wages.  Nor is the proper comparison to what would have happened if there had never been an increase in the supply of saving.  The proper comparison is what would happen if there was a increase in the supply of saving by purchasing government bonds.

Read the whole thing.

What should we do if Piketty is right?

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The biggest non-fiction book release of 2014 was surely Thomas Piketty's Capital in the 21st Century which managed to inspire a frenzy of response from academics, the intelligentsia, and even huge sales. I hope I can fairly reduce his argument to the claim that wealth inequality will widen if the return on capital (r) is higher than the growth rate (g). Recently Matt Rognlie has presented it with what many have seen as a very serious response (pdf) based on the point that more or less the entirety of the widening in the wealth gap since the 1970s has been down to rising land values, themselves based on restrictive planning policies rather than a fundamental mechanism to do with r and g.

Without having got more than 10% through Piketty's book, I'm hardly in a place to weigh up these perspectives, but I was very interested by a new paper from Clemens Fuest, Andreas Peichl and Daniel Waldenström, whose work on corporation tax I already knew well.

Entitled "Piketty's rg model: wealth inequality and tax policy" (pdf) it finds some evidence for his model being true, then asks 'if it is true, what shall we do?' Well it turns out that we should pretty much follow the ASI's budget wishlist policies!

Increasing the taxation of mobile capital is only possible on a global scale, as suggested by Piketty (2014). Experience with policy coordination in this area suggests that this will not be possible. It therefore seems more promising to try to increase rather than to decrease r through tax policy.

Some evidence suggests that recurrent taxes on immovable property and consumption taxes (and other property taxes) are the least distortive tax instrument in terms of reducing long-run GDP per capita. Increasing these taxes and using the additional revenue to reduce labour taxes, for instance, would probably stimulate growth and have positive effects on the income distribution.

Tax consumption, tax (the consumption of) land values, reduce distortionary taxes on labour (and, we might add, capital and transactions). If Piketty has as much influence on the Left as it looked like he might then maybe the world's tax systems are in for some major boosts to efficiency!

An interesting view of what bankers actually do

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It's a commonplace in the public square these days that bankers are the evil ones, designing odd products like a CDS or CDO, to trap the unwary investor into parting with all their worldly wealth. and then there's the occasional expression of a more obviously sensible view, as in this one about Islamic banking:

Many of the instruments Irfan discusses were sold by major banks that saw them as just another opportunity. This is not surprising: Governments and wealthy individuals wanted financing that complied with their religious requirements, and banks gave it to them. Irfan, by contrast, longs for an Islamic finance industry that caters to “small and medium-sized enterprises, retail customers, the man in the street” and offers something “beneficial to everyone, irrespective of creed.”

The actual book is about Islamic financing, a subject we find quite fascinating. For of course the basis of said Islamic financing is an outright denial of something that we hold to be an obvious truth: there's a time value to money. That there is is what leads to there being an interest rate and also to all those other techniques like discounting to get to net present values and so on. We take these to be simply obvious truths about the universe that we humans inhabit and one can, as experiments have, derive the existence of that time value by studying small children. A baby doesn't get the idea of delayed gratification for greater gratification, a three year old will usually grasp the idea of two sweeties tomorrow instead of one now and a 6 year old might go for two in a week for one now. This is an interest rate and it does seem to be innate in human beings.

So, obviously, it could be seen as a little odd that we not only enjoy but thoroughly approve of these various Islamic alternatives. For they all (things like Sukuk bonds and so on) depend upon the absolute rejection of interest, that very thing that we insist is part of the fabric of our reality. The reason we so like Islamic finance is because all of he successful forms of it are actually constructs that, in the face of the religious insistence that there should be no interest, actually operate in a manner to ensure that there is a time value to money and that there is an interest rate, interest which has to be paid.

Which brings us back to what we liked about that description of banking: they bankers are simply providing what their customers want. Seems a more honest trade than many to us, enabling someone to meet their religious obligations while still saving for their old age and the like.

Economic Nonsense: 31. The modern economy is so complex that only government can manage it

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Actually, the opposite is true. The modern economy is so complex that even government cannot manage it. Who can manage it, then? The answer is no-one. No single authority or group of people can handle the volume of information, the speed of its responses and the complexity of its relationships. This is not to say that the modern economy is out of control, but only to say that the self-regulating mechanisms within it can respond more rapidly and more surely than any body outside of it. A market economy is a self-regulating system. It responds to new information and signals people to change behaviour accordingly. Much as a thermostat detects temperature changes and adjusts the heat supply, so the market detects imbalances, shortages and surpluses and leads people to alter their behaviour in ways that redress them.

Some people wrongly suppose that if the economy is not centrally controlled in some way, then chaos will result. Not so. The order of the market arises spontaneously from the millions of interactions constantly taking place. It holds more information than any group of planners could hope to access, and it is faster to react to changes than any controlling authority could manage to achieve. It is also more intelligent, representing as it does the minds of the many rather than the limited brain power of a few people grouped around a table trying to direct it.

The economy directed by the actions of many allows different individuals to purse their separate goals, where the centrally directed economy is geared to achieving the aims of its planners instead. The market economy thus allows people to give effect to their own values and priorities, to be autonomous actors rather than the agents of someone else's will. It allows for a society that is more free as well as more efficient.

When the process is the punishment

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It's about time that we Brits adopted an entirely sensible piece of American law. In their Constitution they not only insist upon a fair trial they also insist upon a speedy one. The actual enactment of that promise is left to State law, but at least some of them insist that a trial must start within 30 days of charges being laid. The defendant may apply to extend that period but the prosecution may not:

While their colleagues covered events like the London 2012 Olympics, the Queen’s Diamond Jubilee, Andy Murray’s Wimbledon win and the birth of Prince George, the four Sun men stayed at home, on bail, suspended from their jobs, trying to maintain their mental and physical health.

Murderers, rapists and terrorists can expect to wait no more than a year to be tried once they have been arrested, but the four journalists were left in purgatory for three times as long.

Leave aside whatever one might think of this particular case, the law surrounding it or the verdict. And concentrate just on the idea that these men had some 10% of their working lives taken from them before being found not guilty. There won't be any compensation for this either. And that's turning the process of prosecution into something much more akin to the punishment itself, rather than what it's supposed to be, the finding and nailing of those guilty enough to be punished.

What should create fear in the rest of us is that given the volume of laws that weight upon us we're all in theory capable of being prosecuted for something or other. And our vindication by a good and sensible jury will be as nothing if the punishment is the process of getting the case in front of a jury in the first place.

So, yes, we should institute that American idea. Justice delayed is justice denied and so we should have a (short) time limit in which the prosecution must put up or shut up.