World Bank states the obvious - unions outraged

An interesting little tale here. The World Bank states the blindingly obvious and unions, as a result, are outraged. The point being made is that minimum wages, protections for labour, can be "too high." Too here meaning high enough to damage both employment prospects and the economy in general. Therefore such wages and protections should be lower to the benefit of all. It's really not an outrageous thing to say at all:

A working draft of the bank’s flagship World Development Report – which will urge policy action from governments when it comes out in the autumn – says less “burdensome” regulations are needed so that firms can hire workers at lower cost. The controversial recommendations, which are aimed mainly at developing countries, have alarmed groups representing labour, which say they have so far been frozen out of the Bank’s consultation process.

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The WDR draft says: “High minimum wages, undue restrictions on hiring and firing, strict contract forms, all make workers more expensive vis-à-vis technology.”

That second is obviously true, there's a "too high" level. But the important part of all of this is the bit "developing countries." Take the examples of India or Bangladesh (as one of us did just recently) where as much as 85% of the labour force is outside that formal economy. Where, this meaning the same thing, that 85% of the labour force have no protections at all from such legislation. Indeed, they're locked out of that formal economy by the costs of hiring labour into it.

It would be better if the protections, the costs, were lower so that more of the population could enjoy them, no?

The unions are outraged, of course they are, because they work for their members. Which, in those developing countries, means only those in that formal sector. So what about the nation as a whole, so what about the workers, it's our workers and ours only that we care about. Which is fine, of course it is, but we do need to remember that they do work only for their own members.

It is possible for the protections on offer to formal labour to be too high. A useful method of working out when that is being that the vast majority of the working population can't get hired into formal labour because of the costs of doing so. Thus, and ineluctably, things would be better if the protections were reduced. As the World Bank is saying and as the unions, those representatives of formal, and only formal, labour are complaining about.

Quite the most stunning piece of research we think

We're told that Waitrose is to install health food police. In fact, they're going to train their shop assistants to be helpful:

Once trained up by qualified nutritionists, shop assistants will advise and direct customers who ask towards healthier choices on the shop floor free of charge.

For example a shopper deciding on a meal to cook for supper might be advised to buy quinoa instead of rice, Waitrose said.

They will also be trained to suggest recipes to shoppers, and advise them on how to read food labels and where they can find reliable sources of nutrition information.

It's entirely true that the British police are famed for what they'll do if asked - like tell the time. However, a fairly important point about police - as opposed to these assistants - is when they'll intervene if not asked. We're not, for example, being told that there will be barks of "Oi, you! Fattie! Step away from the ice cream, drop the frozen pizzas" which is what a police approach would entail.

However, what sparks our interest is this most stunning piece of research:

Research shows that shoppers tend to reach for unhealthy options in supermarkets if they do their shopping while hungry.

For example participants in a Cornell University who were hungry purchased more high-calorie products, the researchers found. 

Well, yes, we rather think that's how hunger works isn't it? It's a signal to the body that it needs more calories. Time to go off and hunt or gather some more, the hungrier we are the more and denser the calories should be.

That is, this isn't an error, this is the point. We're more than a little worried at people not getting this. Not just about food and hunger, but more generally, people missing the point. For example, we're often told QE failed because it raised asset prices. But then the point of QE was to raise asset prices to make investing in making more assets more attractive. That is,  raising asset prices was the point of QE.

We really do think we'd all be better off is rather more people got the basic point of what it is that we do. You know, like hunger prompts us to eat? It's a pretty useful little signal in fact....

Tianah

When I ask 20-somethings just out of university what they want to do, they often tell me that they would rather not work for a company driven by profit. “Profit-making isn’t a good cause.” Seeking profit is a sign of “greed”.

I realised that something needed to be done to address this trendy aversion to capitalism. The economic case for the profit motive has been around for a long time, but many young people are not taking notice, if they have ever even encountered it. So I created Tianah, a short documentary about my friend, to show the human side of profit.

Tianah tells the story of how ambitious entrepreneur, 23-year- old designer Christianah Jones, went from a teenage Psychology student selling clothes from her bedroom on the Depop app, to the businesswoman who created the famous Slim Shady sunglasses brandished by Bella Hadid and Kaia Gerber today.

This is a snapshot in the life of one of the many entrepreneurs active in London in 2018 – a celebration of individualism, technological advancement, and the beauty and necessity of the profit motive.

When Tianah was a teenager she was a fan of style. Since there are so many styles to try, she hated wearing the same thing twice. This made her stand out, but led to clothes stacking up in her bedroom. To get rid of them and make quick money, she sold them along with other cheaply sourced fashion finds that she would patch up herself. It became a hobby, and demand grew. It was when she made a profit and sales kept improving that she realised this is how she might not only make a living, but achieve the success in life she desired.

Tianah took the risk of quitting her graduate job and abandoning her plan to continue her studies to master’s and PhD level. Then she could focus full-time on her business and creating her own fashion lines. With no other income, this step forced her to find increasingly imaginative ways of sourcing labour and materials and keep ahead of what the young masses craved.

It is an inspiring story; it says that backing down from your ambitions in the face of popular beliefs can compromise not only your own success, but your ability to lift the cynics up with you. Tianah explains why profit is vitally important to her survival and why she aims far higher than merely getting by.

If Tianah invests her time, money, special knowledge, and materials into making her latest fashion idea a reality, and these efforts make money, it is a signal. It means that her product – the combination of the resources she brought together in her own way – is more valuable than the sum of its parts, more valuable than those parts were before her vision connected them. If she loses money, she is destroying value, and those resources would have been better expended elsewhere.

As Tianah puts it, nothing is free in this world; she gives people the feel-good factor and she receives something in return for that.

By choosing to buy Slim Shadys, someone has decided that the money it would cost to buy the Slim Shadys is worth less to them than the Slim Shadys being on their face. It is personal; the customer knows best. Others are free to come along and create a better product. But when Tianah does it better, she wins the customers’ money and creates more of the same product that is making people better off than they otherwise would have been. Crucially, the product will become more ubiquitous and affordable as creators realise there is money to be made and compete for business.

Slim Shady sales are an example of this process which transcends fashion and can improve everything from supermarkets to schooling. It is a process that leads to more wealth being created, not taken from anywhere. It is why, throughout history, entrepreneurs such as Tianah contribute to human progress. Profit-seeking means everyone gets richer and life gets better.

Profit makes the world go ‘round.

The world is getting richer or freer - probably both

An interesting little snippet in the FT:

The findings show that demand for cash continues to rise globally, despite t increase in electronic payment options, including mobile in recent years. Cash in circulation relative to GDP has increased to 9.6 per cent across all continents, up from 8.1 per cent in 2011.

The more general rise in the demand for money is evidence of the world getting richer. As with a restaurant which moves from serving 50 covers to 150, a restaurant which is going to need more plates. A larger economy needs more money to lubricate it - thus Milton Friedman's strictures on why the money supply must grow but moderately and in pace with GDP.

But cash relative to GDP is something different. That's an expansion in freedom. 

As we've pointed out before cash is untraceable and anonymous - that means that we can do things the prodnoses would prefer we didn't with it. Escaping the prods of the nosey is indeed a rise in freedom. Yes, there's also the possible loss of tax revenue in a grey economy to consider but then which do we think more important? Liberty or paying for diversity advisers?

Your answer might differ from the logically correct one there if you are a diversity adviser but it's pretty clear to the rest of us.  

Happy Birthday David Ricardo!

Today marks a significant birthday, that of the English economist, stockbroker and politician, David Ricardo (1722-1823).

His career began as a successful broker and speculator. It was said that he made £1m by misleading market players into thinking that the French had won the Battle of Waterloo, and then buying stocks and bonds cheaply.

But Ricardo is much better remembered today as an economist. His career in this field started when he read Adam Smith’s Wealth Of Nations (1776). Applying rigorous logic to Smith’s ideas, he made important developments in the theory of rents, wages, profits, taxation and value. In 1809 he argued that the high inflation in England was the result of the over-issuance of banknotes—making him an early monetarist. Like Smith, he opposed protectionism, arguing that the Corn Laws (which restricted wheat imports) made domestic production inefficient and drove up rents.

Ricardo’s greatest contribution to liberal thinking was perhaps his theory of comparative costs (now known as comparative advantage). Countries, he said, could make themselves better off by specializing in what they can produce relatively cheaper (in terms of what else they might have produced) than other countries. Even if a country can produce everything more cheaply (in absolute terms) than another, they are still better to specialize and trade in the goods where they have a comparative advantage. 

This principle became and remains one of the key foundations of the argument for free trade. So let’s raise a cheer for David Ricardo, 296 but still going strong—or at least, his ideas are.

Communal Forgetting

Throughout my school years we didn’t spend much time talking about the Russian Revolution and its atrocities and I’d bet that most of my peers wouldn’t know of any genocides except for perhaps the Holocaust. Though I grew up in Denmark, this is not strictly a Danish problem. According to a report by The New Culture Forum similar tendencies are seen in the UK. In a survey they found that less than ⅓ of 16-24 year-olds have studied the Russian Revolution at any point in school. Furthermore, they found that of secondary school children aged 11-18 81% weren’t able to mention a genocide other than the Holocaust.

What’s more, in their report they presented a list of 22 historical figures to respondents and asked them to indicate whether they associated that name with crimes against humanity or not. It turns out that a significant proportion associated George W. Bush (39%) and Tony Blair (34%) with crimes against humanity, far more than did Communist mass murders like Pol Pot (19%).

In a different survey the respondents were presented with a different list of another 15 historical figures and were asked to indicate whether they would consider them to be a dictator or not. Surprisingly, more people thought of Ronald Reagan (9%) as a dictator than Nicolae Ceaușescu (8%).

The list of surprising findings goes on. In a third survey designed to test respondents attitudes to various ideologies, socialism is viewed as the most positive ideology while only receiving the second worst negative score. Unfortunately, it seems the brand socialism has not been contaminated by the crimes and atrocities of Communism - rather the opposite.

By now, we’ve established that lack of education is the problem. Therefore, getting out on the platforms where young people spend their time to educate them on Communism and its consequences might help turn the tide. Good friends of the Adam Smith Institute have created a project, Museum of Communist Terror, with the aim of keeping the knowledge and understanding of the deaths, terror and economic failure of Communist regimes alive. They plan on doing this through social media and talks for schools and universities among other things that ultimately will lead up to a museum in London.

Part of their strategy is also to educate people through small videos with experts and victims of Communism. I highly recommend that you spend 2 minutes watching their most recent video on the Holodomor and perhaps share it with your friends.

Time to thaw out support for free enterprise in Iceland

I’m just back from Iceland, which is (as always) an interesting place. It had more difficulties than most after the 2008 financial crash, largely as a result of Gordon Brown’s outrageous use of anti-terrorist legislation to freeze the assets of Icelandic banks—no way to treat a country that was our best friend in Europe, and something that still rankles. As it turns out, Icelanders grudgingly admit, Brown did them a favour. Iceland’s banks had grown beyond financial reason, thanks to policies of cheap credit and easy money—much like the UK’s (the Royal Bank of Scotland, for instance) but even more so. Brown’s shock therapy forced the sector to restructure, and today it is much healthier. Iceland has paid off its debts, and is now doing many of the right things. A pity, really, that Brown did not dose out the same medicine at home: instead of a quick and painful restructuring, the UK has had a lingering and painful non-restructuring and is still living beyond its means.

Iceland was never bankrupt, thanks to its fishing and free geothermal energy, not to mention the resilience, stamina and enterprise of its people. But the shock of the crash and the Brown collapse led to years of political turmoil. Confidence in politics and business was shaken (despite the fact that it was bad policy, rather than bad businesses, that caused the crash—the usual inflation-fuelled fake boom that ended in the usual destructive real bust). So Iceland’s business lobby has been on the back foot, while the current prime minister is a Socialist Green who spouts the familiar nonsense about inequality and Gini coefficients (a proxy critique of capitalism and an attempt to legitimise larger statist control).

And despite having restructured the finance sector, paid its debts, and got inflation under some control (it’s currently about 2.5%), other things are going wrong too. Iceland’s taxes are among the highest in the OECD: the average Icelander works 170 days a year for the state, from the 1st January to the 19th June. And as we know from the Rahn Curve, high taxes mean low growth. That’s because high taxes kill enterprise (why take risks when the government takes half your profit) and make your goods more expensive. So it’s time for a really serious zero-based review of all government activities. Does Iceland’s government do things it doesn’t need to? Yes. Could other people deliver some services better? Yes. Can the essential government functions be done better? Yes.

But in small countries, the cronyism between business and politics is hard to break. Too often, Iceland’s businesses see big government as an easy source of cash, when they should be proclaiming free markets. But given Iceland’s crazy post-crash politics, even those who believe in free markets have been reluctant to be seen advocating them.

It has indeed been a difficult decade, but with things now going reasonably on the economic front, it is time for Icelanders to put that decade behind them and look to the future. To liberate enterprise with open institutions—low taxes, sound money, free markets—that motivate people to go out and create wealth for everyone. Not a bad lesson for any country, really. 

The Office for National Statistics proves Hayek Right. Again

There are those who insist that we can plan something as complex and chaotic as an economy. If only all the bright people were stuck into offices they'd be able to make all do as they insist and the world would be a better place.

It doesn't seem to matter how often reality comes around to give them a smack in the mouth, the belief persists. One such slap coming from the Office for National Statistics

Britain’s trade deficit is almost £10bn smaller than previously thought as financial trading is a bigger boost to the economy than experts had realised.

A new system for counting goods traded in and out of the UK also meant the deficit came in smaller, improving the economic outlook.

The 2016 deficit in trade in goods and services was one-quarter smaller than had been understood, at £30.9bn, not the £40.7bn estimated earlier. Around £5bn of the improvement comes from financial trading.

The economy was also £5.6bn larger than previously estimated, the Office for National Statistics said, due to financial trading profits.

It's entirely true that in a floating currency system trade deficits don't matter at all. But then those who would plan economies tend also to think they should be determining exchange rates - where deficits do matter in a fixed exchange rate system. And now we find that this specific number is 25% out? 

As said, that feeds through into the size of GDP. Which in turn feeds through into productivity numbers - UK productivity is 0.3% higher as a result of this change. The financial system is significantly more important to the economy than we thought, perhaps as much as 7 or 8% larger in fact.

And people want to try to plan an economy when we've this little knowledge about what is happening, let alone what will happen when all those clever people act on such sketchy information?

Hayek was right, wasn't he? We've not actually the information to be able to do such planning. As he pointed out, and as has been confirmed is even true with all these computers around, we cannot have such knowledge either.

Sadly, this little slap will make as little difference to the dreamers as that haymaker of the 1989 revelations did. The insistence upon national planning is a religious, not rational, belief thus reality - however hard it punches - just ain't gonna make a difference.

Yes we CANZUK

We started this week with a piece from Matt Kilcoyne in City AM calling for governments in Canada, Australia, New Zealand and the United Kingdom to seriously consider the prospect of CANZUK at the beginning of the Commonwealth Heads of Government Meeting. 

Today Dr Pirie uses his latest Madsen Moment to call for CANZUK to get greater attention. It's popular. CANZUK International found in polls of 13,600 across the four states this year that 68% were in favour in the UK (up 4% on last year), 76% in Canada, 73% in Australia and 82% in New Zealand. And it's especially popular among the young – somewhat of an open door for politicians to push at. 

 

 

 

Plucking the Taxpayer

Hypothecating taxes makes good politics but poor economics.  The public liked the idea of paying national insurance, when it actually did fund pensions, road fund tax, when it did fund roads, and heritage projects via the Lottery. The BBC licence fee is a form of hypothecated tax. The Times on April 12th reported that most of the public support paying more tax provided it goes to the NHS.  Hypothecation for popular causes is a fine example of plucking the goose to maximise the feathers while minimising the hissing.

Hypothecation prevents government from allocating funds to where the country most needs them.  Priorities will change even though that disrupts planning for the recipients.  But then hypothecated tax flows will vary just as income tax, VAT and any other form of tax does. 

The history of hypothecated taxes teaches us that the Treasury cheats.  The road fund tax, for example, was only used to fund roads until the government decided the hypothecated tax was too much or too little.  Then it was swept into the general pot and the Ministry of Transport had to compete with every other ministry.

The only way to keep the Treasury’s hands off hypothecated taxes is to make the NHS independent of government, i.e. a public corporation like the BBC or the Bank of England.  Jan Zeber and I have made a case, published by the Taxpayers Alliance, for that. Today’s NHS is unmanageable thanks to its size and constant meddling by its parent Department and the DHSC’s 19 quangos.  If the logic of hypothecation was carried through to independence, the DHSC could be immediately scrapped – a considerable saving in itself.  Would we miss it?  Almost certainly not. The DHSC was responsible for adult social care, and yet did nothing about it, for five years from 2012. The funding came from the Department responsible for Local Authorities. Then Downing Street noticed and added the SC to the DH.  It is hard to discern any difference since.

So hypothecation and independence for the NHS should go hand in hand.  That would not entirely prevent politicians trying to make capital out of whatever problems emerge but at least it would minimise their ability to worsen the situation.  We would still require a separate regulator to maintain quality standards (i.e. the Care Quality Commission) in the same way that the BBC enjoys the attention of OFCOM. 

The NHS needs a distant planning horizon, perhaps 10 years, to train nurses (five years) and doctors (10-12 years) and build facilities.  At the same time, 10 years is too long a financial commitment for any government.  The obvious compromise would be for the NHS to have a 10 year planning horizon with hypothecated taxes set for that period but a quinquennial strategic and financial review in case the situation goes awry in either direction.

The more difficult question is how a hypothecated tax should be collected. People have long looked for ways to integrate income tax and national insurance contributions to avoid having to make two separate and complex calculations.  Business would not welcome a third unless it was something really simple like a per capita tax.  After all, we all pay the same prices for what we buy and are equally entitled to NHS benefits, so why not pay equally for health insurance?   

The people reported by the Times as being keen to pay more to rescue the NHS might not like the bill.  Dividing the NHS England cost per capita would be £2,200 each for this year, rising steeply if NHS England’s demands are met.  Remember the Poll Tax.

UK National Insurance Contributions for 2016/7 totalled £124.93bn. It is expected to rise to £136.5bn in 2018/9. Since the income is treated in the same way as personal income tax, it should be scrapped in England and replaced by the “National Health and Care Contribution”  (NHCC) since it would need also to cover the integration of adult social services as is now widely seen to be essential.  The UK NIC total take would need to be reduced by about 16% to give a figure for England alone but that would be offset by removing the exemption for those above the state pension age.  If the elderly will continue to get medicines free at the till, at least they should contribute towards them through the tax system.

According to the Health and Social Care Information Centre, “in real terms [English] councils spent £15.9 billion on social service support for adults ten years ago [i.e. 2003-04]. This peaked at £18.2 billion in 2009-10 before falling to £17.2 billion in 2013-14.” Although some tweeking would be needed, the NIC and NHCC figures would not be wildly apart:

Screen Shot 2018-04-17 at 10.43.58.png

In other words, the two could be swapped over without much cost to the taxpayer or HM Treasury.  Income tax would then cover what NICs now do and the NHCC would cover health and adult care.

As noted above, the NHS needs a 10 year planning horizon but any government would need a five year accountability framework.  For comparison the much smaller and more stable BBC secured fixed annual (licence fee) funding for 7 years in 2010 and in 2016 it was agreed that it should rise in line with inflation for five years from 1 April 2017.

The trade, in essence, for NHS and care independence and its own hypothecated tax should be a five yearly forensic audit by the National Audit Office to establish the extent to which the new English Health and Care Corporation (EHCC) could improve the value for money it gives to patients, the cared for and taxpayers. 

Merging NICs into general taxation implies removing the National Insurance Fund (NIF) and all the bureaucracy that goes with it.  A quinquennial NAO forensic audit of the EHCC would take the place of the five yearly actuarial review of the NIF which seems something of a farce.  In the last (October 2017), accurate forecasts were required through to the 2080s but it does not really matter what the numbers say as the Treasury tops them up to the required level anyway. It is a matter of indifference to the taxpayer from which pocket the Chancellor pays benefits.

If, per contra, NHS England is not given independence, then hypothecation would make no long-term sense.  It might alleviate immediate political difficulties but it would not be long before some future Chancellor is mixing and matching the tax streams.