Yes, it is election season but still, this won't do

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Sadly, we're in an election season, which means that we have those who would rule us displaying their ignorance of the universe we inhabit in pursuit of our votes. Guido has already picked up on this from Natalie Bennett of the Green Party: As newsrooms across the land stop what they are doing to read the Green Party’s response to Labour’s non-dom announcement, it is worth picking Natalie Bennett up on this:

“The last four decades have seen wealth accumulate at the top of society while those at the bottom struggle to get by.”

Now hold on just a darn prosperity-spreading cotton-picking second. Over the last four decades the world poverty rate – people living on a dollar a day or less – has plummetted. ..... in 1970 almost 30% of the globe was impoverished. 40 years later that number is as low as 5%

Or, as that graph above shows, it is actually the poor who have benefited from that globalisation over those decades. As Branko Milanovic explains here:

The top 1% of the global income distribution has seen its real income (adjusted for inflation) rise by more than 60% over those two decades.

What is far less known is that an even greater increase in incomes was realized by those parts of the global income distribution that now lie around the median. They achieved an 80% real increase in incomes.

It is there — between the 50th and 60th percentile of global income distribution, which in 2008 included people with annual after-tax per capita incomes between 1,200 and 1,800 international dollars — that we find some 200 million Chinese and 90 million Indians, as well as about 30 million each in Indonesia, Brazil, Egypt and Mexico. These 400 million people are among the biggest gainers in the global income distribution.

The real surprise is that those in the bottom third of the global income distribution have also made significant gains, with real incomes rising between more than 40% and almost 70%. (The only exception is the poorest 5% of the population, whose real incomes have remained about the same.)

This is, of course, why we here at the Adam Smith Institute support this globalisation, free market sorta stuff. We desire that the poor become richer, this socio-economic system makes the poor richer. Why wouldn't we support it?

More to the point, why would anyone oppose it? For, amazingly in human history, this is the only socio-economic system that does actually achieve this task.

Economic Nonsense: 45. Unbridled capitalism brought about the Great Depression

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In the popular account the stock market went wild in the late 1920s, with people gambling recklessly on stocks and shares, often with money they didn't have.  Shares could only go up, they thought, but they were wrong.  The market crashed, people went broke, investors jumped off high buildings, and without investment GDP plunged and the Great Depression came about.  If it were true it might be a major indictment of unbridled capitalism, but it isn't.

People did overstretch recklessly, assuming the market could only rise, helped by easy money from the Federal Reserve Bank, and the Great Crash came in 1929.  It wiped out many investors, but it did not lead to the Great Depression.  That came later as a direct result of bad policy decisions.  Had those decisions not been made, the stock market crash might have instigated a cyclical downturn and corrected itself after a year or two.

The Federal Reserve Bank, observing that people had bought shares with easy credit, decided to tighten credit and restrict the money supply.  This is what you do not do in a recession, when struggling companies need credit to keep going and companies that see opportunities ahead need money to invest in expansion.  It was a disastrous mistake.

The folly was compounded by protectionist policies.  The Smoot-Hawley Tariff of 1930 shut out most foreign goods to boost home-produced goods in the name of protecting American jobs.  Its effect was catastrophic.  It sparked a beggar my neighbour trade war as other countries responded with tit-for-tat measures.  Unable to sell goods in America, they stopped buying American goods.  International trade plunged and much of the world sank into recession. 

There were other contributing factors.  Banking regulation had been clumsy and restrictive, and left American banks unable to play their part in promoting investment and expansion.  Income taxes were massively hiked in 1932, just when tax cuts could have helped.

Unbridled capitalism did not cause the Great Depression, incompetent government did.  It is another piece of economic nonsense that President Roosevelt's New Deal government activism helped America's recovery from the Great Depression.  It didn't.

New ASI paper: Non-Sense

Out today is a new ASI briefing paper examining Ed Miliband's proposal to end the non-dom provision in the UK tax system. It says:

  • Being a UK resident with non-domiciled status simply means that one does not intend to remain indefinitely. The tax system requires residents to be taxed on their foreign income. Non-doms resident in the UK elect to be taxed on either the arising basis (their worldwide income is taxed automatically) or the remittance basis (they are only taxed on worldwide income if they bring it to the UK). 2008 reforms mean that after 7 years of UK residence, non-doms who choose to be taxed in the latter way must pay a yearly fee of £30,000 (rising to £50,000 after more years of residence).
  • Ed Miliband has claimed that there are 116,000 non-doms but this ignores those of the UK’s 400,000 international students and 6 million foreign-born workers who did not have to file a self-assessment form and those who did file it but did not tick the non-dom box. It is estimated that something like 1 million are not permanent residents, so are by definition non-doms.
  • The rules introduced by Labour (and supported by the Tories) in 2008 ended up only hurting less wealthy non-doms and did nothing to really wealthy ones: electing to be taxed on a remittance basis benefits only those with very high foreign incomes.
  • While most countries tax worldwide income of residents, a significant number including the UK have exemptions for certain people (mostly foreigners) so that they only pay taxes on local income.
  • There is a substantial literature showing that tax systems are very important in deciding where top talent goes. It tells us that punitive changes to the UK tax system could discourage the most valuable potential immigrants from footballers to inventors.
  • Changing how we determine someone’s domicile is likely to have unintended consequences. First, making it easier to acquire a new domicile might reduce inheritance tax receipts, as UK domiciled residents of foreign countries currently pay UK death duties on their worldwide estates. Second, changes to the concept of domicile would have repercussions in other areas of law, such as matrimonial matters and determining the validity of wills.
  • The ethical justifications for Ed Miliband’s view that it is immoral that non-doms do not pay tax on their foreign income are deeply contentious. There is no principled moral case for taxing more than local income.

You can read the full paper here

Abolishing non-doms; welcome to the Laffer Curve

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It's election season so, yes, obviously, all sorts of things are going to be promised. Which gives us Ed Miliband's idea that Labour, if elected, will abandon non-domicile as a tax option. This is an interesting example of where reality meets the Laffer Curve:

The last Labour government toyed with abolishing the non-dom system but simply tightened the rules instead - which were then tightened further by Conservative Chancellor George Osborne.

That is because non-doms still have to pay tax on their UK earnings so successive governments have calculated that, on balance, it is better to have them here making a contribution to the exchequer than to see them flee abroad.

That's a wide reading of Laffer of course, that lower tax rates can lead to higher revenues, higher tax rates can lead to lower. It's something that is obviously true at the extremes and successive administrations, having done those scribbles on the back of the envelope, have assumed that taxing non-doms on their worldwide income would lead to lower revenues.

Miliband thinks this isn't true and so boo yah! to that. However, there's another point that we've not seen anyone mention as yet. Which is that residence and domicile interact in more than one manner. Yes, it is odd that the UK makes this distinction in a way that almost all other countries don't. But that interaction is more complex than just allowing non-doms resident in the UK to not be taxed in the UK on their worldwide income.

The complication is that the distinction allows many who are domiciled in the UK, but not resident, to still be claimed in part by the UK tax system. This is the situation with one of us in fact: not resident in the UK and hasn't been for a couple of decades, but still in part in the grips of the UK tax system as a result of continued domicile.

Further, there's many many more such domiciled but non-resident Brits out there (millions of 'em, million and millions of 'em) than there are the roughly 120,000 resident and non-dom.

Abolition of domicile as a determinant of taxation status would therefore have a much more complex effect than most seem to think. Logically, it might being that hundred thousand odd into the domestic tax net but it's equally going to release every expat from it.

That Laffer Curve really does exist you know, and even in the real world sometimes it bites.

Economic Nonsense: 44. Big business thrives on poor country sweatshops and child labour

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In undeveloped countries people struggle to survive in agricultural economies.  Life is characterized by dawn to dusk heavy labour, even for children, and the rewards are meagre.  Diet is poor and the risk of starvation or at least malnourishment is prevalent.  

In the early years of Britain's industrial revolution, conditions were poor.  Workers toiled for long hours amid safety standards that were often low.  There were sweatshops, and children worked in factories and mines.  This represented an early stage in economic development.  It was a considerable step up from life on farms, where conditions had been worse.  As capital grew, so did the machines that increased productivity and enabled labour conditions to be improved, and for women to leave sweatshops and children to leave the labour force.  It was wealth that made this possible.

Today in developing economies things are made cheaply in crowded working conditions with safety standards considerably below those in the developed world.  Although most countries have rules against it, there are undoubtedly children at work in several of them.  This, too, represents an improvement on the conditions found in the countryside.  The wages paid in sweatshops, well below those in the West, are far above those afforded by the agrarian economy.  Sweatshop workers enjoy higher living standards than their counterparts outside, and put their families' and relatives' names on the waiting list for any vacancies that occur.

This is not "big business" grinding the poor.  It represents a country's labour force reaching up to improve its lot by earning wages not possible elsewhere.  Globalization has made this possible, bringing many of the world's poorest people into the world market.  The goods made cheaply in poorer countries sell to richer ones, providing an inflow of cash to boost the poor country's economy.  This is how China and India have achieved growth rates that have lifted over a billion people out of dire poverty.

As the UK became richer, it was able to improve working conditions and pay, and to eliminate sweatshops and child labour.  The same will be true of today's developing countries.  Many of them are already doing so.  The faster they become wealthy, the sooner this will happen.  The way to speed it up is for rich countries to open their markets and buy as much as they can from poorer ones.

Private parts of the NHS say the NHS should not be privatised

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Just a small note. There's a letter in The Guardian insisting that the NHS should not be privatised in any form or manner. Hey, you know, election season. There's some 100 or more signatories to it. Of whom 46 are listed as being GPs. Yes, General Practitioner. That part of the NHS which has always been privately owned, run and managed, as contractors to the larger organisation.

46% of those shouting that there should not be private sector contracting to the NHS are themselves private sector contractors to the NHS.

It is, of course, possible that their own working experience leads them to believe that such contracting is a bad idea. In which case, of course, we should see the same people (including at least two past heads of the Royal College of General Practitioners) arguing that GP services must be nationalised and sharpish. We don't, so that cannot be their argument.

Which leaves us really with only one possible explanation: a gargantuan ignorance of their own situation. And a general piece of advice to the wise: pay not much attention to the opinions of those who prove themselves, publicly, to be gargantuanly ignorant.

Why don't we just be sensible about housing?

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A fine piece in the Telegraph about British housing. The major point being that we have so many layers upon layers of housing policies, each trying to undo the inefficiencies created by the previous layer, that we might as well scrap the lot and actually have a free market again: Each and every proposal wheeled out in the course of the election campaign involves yet more complexity. Hidden subsidies are added to distortions, and rules and regulations are piled on top of each other until their purpose gets lost. If a therapist was analysing British housing policy, they’d quickly conclude the patient was suffering from obsessive-compulsive disorder. The Government comes up with one kind of subsidy, doesn’t like the side-effects, then comes up with another to try to correct it.

In fact, the simplest thing would be to strip away all the distortions, and try creating a free market in housing.

Quite so, we have been saying this for some time ourselves. Just as an example, the last time the British housing market managed to produce the level of new build that all say is necessary today was in hte 1930s. That is, before the Town and Country Planning Act and back when we did in fact have a free market in who may build what and where. If we want to get back to that level of building then why on Earth don't we go back to those policies? We do, after all, have actual evidence that it works.

Worse, and this is less widely discussed, our homes are getting smaller. A survey by LV Financial Services last year found that the average size of the British home had shrunk by two square metres, from 98 to 96 square metres, in the decade from 2003 to 2013. The average new home built in the last five years measured only 76 square metres, so that average is only going to come down. According to research by the think tank Policy Exchange, we now have the smallest homes in Europe. Even the Greeks have more space to live in than we do.

The average Irish home is 15pc bigger, a Dutch one 53pc, and a Danish one 80pc more spacious. Those are huge differences, given that many of those countries are poorer than we are, and just as densely populated.

Why are we doing this to ourselves? Insisting that people live in rabbit hutches that cost 5 and 7 times annual incomes? And, as we all know, the major cost of a house in the SE of England (where the problem actually exists) is that scarcity value of the chitty to build a house on a particular piece of ground. Simply issue more chitties and the problem is solved. Better yet, abolish the system of chitties altogether.

You know, the way to solve problems caused by government is to get government to stop doing the things that cause the problems. Housing is expensive in England because of government, let's have less government and make housing cheap again.

Economic Nonsense: 43. Private enterprise cannot generate public goods such as lighthouses

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In fact private enterprise supplies many public goods, although few commentators think they should provide all public goods.  Lighthouses are often cited as an example of essential services that only the state can provide, but the Nobel laureate Ronald Coase showed that many lighthouses were indeed built and operated by private enterprise.

They had their origin in the hilltop fires that were lit near ports to guide incoming ships.  These eventually evolved through wooden or stone towers into their modern form with steady improvement in their illumination.  They were financed by contributions from nearby ports, which incorporated the costs into landing fees charged on boats entering the harbour.  The state's role was to allow operators to levy such charges, in order to counter free riders who might seek to benefit from the lighthouse without contributing to its upkeep.  When the state took over their maintenance and operation, it was not because they were failing, but to standardize the charges which were then subject to wide local variations. 

Britain's Royal National Lifeboat Institution (RNLI) is an example of an independent public service supported by voluntary contributions rather than out of taxation.  For a few years in the 19th century the RNLI did take government money, but found its private contributions dropped off by more than it received in tax support, so it reverted to voluntary finance, which it maintains to this day.  Because contributions are voluntary, there are undoubtedly freeloaders who benefit without contributing, but there are enough public-spirited people to sustain it through their support.

The usual way of providing public goods privately is by a charge levied on users, as the early lighthouses did.  Modern technology makes it easier to identify users and to charge those who wish to benefit from the service.  The BBC was originally financed by a licence fee to provide and broadcast its programmes, but later media providers have used first advertising, as with ITV, and then subscription services, as with Sky.  Many would say that it is fairer and more appropriate for public services such as these to be paid for by those who benefit from them, rather than use taxpayer funds.

Women like dyads - men like groups

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According to social psychology, stereotypes about groups tend to be accurate. This makes sense, because you'd expect an inverse Gresham's Law to operate: accurate stereotypes make you better at life; inaccurate stereotypes make you worse. It's like how markets drive out taste-based discrimination (racism, sexism) by making people pay for their unjustified prejudices. One such accurate stereotype is that women prefer one-to-one dyadic relationships, and men prefer membership in larger groups, particularly hierarchical coalitions.

New evidence for this comes in a recent study: "Women Favour Dyadic Relationships, but Men Prefer Clubs: Cross-Cultural Evidence from Social Networking" (full html paper) by Tamas David-Barrett, Anna Rotkirch, James Carney, Isabel Behncke Izquierdo, Jaimie A. Krems, Dylan Townley, Elinor McDaniell, Anna Byrne-Smith, and Robin I. M. Dunbar.

They added to the literature supporting this result in a rather interesting way:

The ability to create lasting, trust-based friendships makes it possible for humans to form large and coherent groups. The recent literature on the evolution of sociality and on the network dynamics of human societies suggests that large human groups have a layered structure generated by emotionally supported social relationships. There are also gender differences in adult social style which may involve different trade-offs between the quantity and quality of friendships. Although many have suggested that females tend to focus on intimate relations with a few other females, while males build larger, more hierarchical coalitions, the existence of such gender differences is disputed and data from adults is scarce.

Here, we present cross-cultural evidence for gender differences in the preference for close friendships. We use a sample of ~112,000 profile pictures from nine world regions posted on a popular social networking site to show that, in self-selected displays of social relationships, women favour dyadic relations, whereas men favour larger, all-male cliques. These apparently different solutions to quality-quantity trade-offs suggest a universal and fundamental difference in the function of close friendships for the two sexes.

This plays into Roy Baumeister's & Kathleen Vohs's work (see e.g.) on some of the sex differences (again, these may be biological or socially/culturally constructed) that may be working to underly differences in labour market activity and in turn the gender wage gap.

There is no inherent reason why men and women must have on average similar lives in order to have equally good lives; or in order for them both to have as good lives as possible (even if not equally good). It's OK for there to be differences between men and women.

Miliband's zero hours contracts catastrophe

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Ed Miliband's latest attempt to screw up a part of the economy is his proposal to legislate on zero hour contracts:

"If you work regular hours for three months, Labour will give you a legal right to a regular contract, not a zero-hours contract."

I have no doubt Ed Miliband isn't ignorant of the fact that such a policy will harm lots of people and help only a tiny few, yet he doesn't seem to care two hoots - he supports the policy because he knows most people will endorse it based on the help for the tiny few while at the same time being wholly oblivious to the wider harm it will do. If you happen to be one of those few to whom that applies, you'll be happy. But for the vast majority, the labour market of supply and demand involves an allocation of resources (work and wages) far beyond the scope of any top-down management, and with far more efficiency than state meddling can achieve. Telling employers they must offer a regular contact after three months (a figure seemingly plucked out of the air) can only harm the efficiency of mutually allocated resources. This isn't anything more than standard first year economics - something politicians seem to be happy to ignore to buy votes.

What Ed Miliband is missing is the most important point. Yes, some people struggle on zero hours - the part of the labour market that contains much of this kind of work is often insecure, unstable and volatile anyway - but the notion that this law will make things better is moonshine. Here's the key point. The labour market of supply and demand is dictated by numerous price signals that generate all kinds of information about the value of labour, the supply of services, length of contracts, and so forth. A dentist can work in the same place for 15 years doing a similar number of hours each day. A sub-contracted painter and decorator can work at dozens of places in that time, with varying lengths of contract. Selling labour is heterogeneous - and you're just not going to be able enforce better pay or more stability without damaging a whole sub-section of people in that labour market.

So it's not that I'm repudiating Ed Miliband's proposal because I've suddenly developed amnesia about the struggles of people's ability to live or the volatility of the market - I'm repudiating it because its implementation will simply alter the behaviour of employees and employers in the market because the vital price signals of information on which the economy runs will be distorted.

It's easy to think of zero hour contracts only in terms of employees, and to imagine most employers to be cold, uncaring exploiters. But it distorts the true reality. Economic policies affect employers as well as employees - and employers are the essential providers in this equation. Make a law that helps low earners and you hinder another group (usually low-skilled employers but also other low earners). Make a law that helps tenants and you hurt another group (usually landlords). Make a law that helps Brits and you hurt another group (usually anyone who isn't a Brit). Nothing comes without a cost.

Employers have lots to consider when they take on people. They have to make forecasts about the future; they have to consider market fluctuations; they have to consider what they should invest; and they have to consider which future state-interference will hamstring them. Zero hour contracts are sometimes opportunities to exploit, but they are mostly opportunities to reduce risk in a frequently unstable market, and create lots of short-term employment.

Think who the beneficiaries might be - students, single parents, those looking for additional employment to top up their main job, and those with multiple part time jobs. The ability to work flexibly as and when they want is a very beneficial thing for them. Ed Miliband's proposal to ruin theirs and their employers' flexibility is narrow and short-sighted.

What Ed Miliband also doesn't understand is that the economic growth is the main vehicle to reduce zero hour contracts for those not happy with them. The reason being job growth increases the necessity for employee stability, which will only diminish the allure of zero hour contracts for both employers and employees, because employers are going to want stability in their personnel. Moreover, as unemployment rates fall and job creation continues to take place, greater power is transferred to jobseekers, which places selection pressure on firmsoffering less desirable contracts. Ironically, Ed Miliband's proposal will uproot some of the stability in the market, which will more than likely go on to have a cobra effect type scenario whereby he contributes to an increase in zero hour contracts - the very opposite of what he's trying to do.

The state's role is to reduce the tax burden for people on low incomes or in volatile parts of the market, and give them the financial help they require, leaving those vital price signals untouched.