Motorways, pubs and nannies

A new pub has opened in Beaconsfield, Buckinghamshire. That's news in itself, given that around 1200 pubs closed down last year, thanks (or no thanks) to the weight of retail and employment regulation that makes pubs so darn expensive to run.

But the Hope & Champion is of doubt interest, because it is in the Extra Motorway Service Area at Junction 2 of the M40. So the people who go there are almost certain to get there by car. So naturally there have been plenty of critics complaining that this initiative sends out all the wrong signals about drinking and driving.

Well, pubs in the UK are licensed, precisely because we know the potential problems that can go with alcohol consumption. But the fact is that the local police did not object to the licence, nor did the local authority. And the local paper is giving the new pub splash coverage. So local people don't think there's a problem here.

The real problem is the message that the critics send out, yet again – that the political class in Britain thinks the adult population of their country are completely incapable of making their own choices, and that their lives have to be micro-managed for them. This pub, like most others these days, is basically a restaurant that also serves alcohol. It opens at four in the morning and starts selling alcohol at nine - though apart from one stalwart getting stuck into a pint for the cameras, most people there this morning were getting stuck into nothing more life-threatening than a Full English Breakfast. And if a group of people want to stop off the M40 for lunch or dinner, why should the passengers be denied the pleasure of a small sherry just so that drivers are 'kept away from temptation'?

Weatherspoons, the pub owners, are a responsible chain. Their menus carry Drink Aware slogans and information. Their staff do not serve people who have already had enough. People know that there are legal limits on drinking and driving - and they know that even drinking below the legal limit can slow down your reactions. So most drivers who visit the pub, alone or with a group, would probably not have alcohol anyway, and their passengers would probably not want them to.

So as the police and local authority figure, there's no problem. The only problem is all those people who deem it their business to treat us like children.

On why I just love the latest Oxfam report

You'll have seen the stories about this latest Oxfam report all over the place. The bottom 50% of the world has the same wealth as the top 85 people etc. This is presented as if it's an obviously bad thing and yet I cannot quite bring myself to agree with that conclusion. Here's the list of evidence they compile:

Almost half of the world’s wealth is now owned by just one percent of the population.

• The wealth of the one percent richest people in the world amounts to $110 trillion. That’s 65 times the total wealth of the bottom half of the world’s population.

• The bottom half of the world’s population owns the same as the richest 85 people in the world.

• Seven out of ten people live in countries where economic inequality has increased in the last 30 years. •

The richest one percent increased their share of income in 24 out of 26 countries for which we have data between 1980 and 2012.

• In the US, the wealthiest one percent captured 95 percent of post-financial crisis growth since 2009, while the bottom 90 percent became poorer.

OK, let us just, for the sake or argument, accept all of that as being true.

So, what else has been going on in the world over this same 30 odd years of excessive neoliberalism? Actually, no, let's just look at one other thing the Oxfam reports tates first:

Some economic inequality is essential to drive growth and progress, rewarding those with talent, hard earned skills, and the ambition to innovate and take entrepreneurial risks.

OK, so let's also take that as being true, just for the sake of argument. So, what has been the effect of the world moving in the direction Oxfam describes it as having done?

Well, we've had the greatest reduction in absolute poverty in hte history of our entire species, as I've noted here passim ad nauseam. We've also had global inequality falling even while in country inequality rises. So we could certainly make a case that we've got the right amount of inequality to drive that growth and progress that we actually desire.

For we do want the poor to become richer, don't we? We want hundreds of millions, nay billions, to climb up out of historical peasant destitution and into the bourgeois pleasures of three squares a day and a change of clothes? And if inequality is, per se, a problem then we'd like it to be reduced globally and not just within some arbitrary lines on the map that make up nations?

So, erm, it would appear that the very things that Oxfam are complaining about are producing exactly the goal that we at least desire and Oxfam should at least be considering desirable.

Which leaves us with only one question left. Just why are they complaining about this?

Hannan, Law and Innovation

I was struck by a passage in Daniel Hannan's new book How We Invented Freedom And Why It Matters. As a UK Member of the European Parliament, he is always asking other MEPs why they think new rules are needed, in banking, working hours, herbal remedies and much else. As he says:

"The response is always the same: 'But the old system was unregulated!' The idea that absence of regulation might be a natural state of affairs is seen as preposterous. In Continental usage, 'unregulated' and 'illegal' are much closer concepts than in places where lawmaking happens in English."

This is a profound point. We've all heard about the differences between British (specifically, English) and Continental Law. In English, Common Law, rules are decided by courts in response to some 'specific problem' arising. In Continental, Roman Law, rules are laid down by the authorities. So in Britain, things are presumed to be permitted unless there is a law to stop them. On the Continent, things are presumed to be prohibited unless there is a law to allow them.

I always figured that such traditions explain why the British are more enterprising, and why they have a much lower opinion of their authorities: to them, politicians and officials just get in the way of what you want to do. To a continental, though, they are people you need to coddle and get onside in order to do what you want to do.

But Hannan's illustrative conversation explains much more: specifically, why the European Union generates so much regulation. To the Continental mind, for something to be permitted, there must be a law – or a set of regulations – permitting it. If you are doing something that is not regulated, you must be up to no good. Indeed, it is cheeky of you not to have asked permission in the first place.

In slow-moving societies, this might work tolerably well. But when you are facing rapid social and economic change, as we are today, the Continental presumption of required consent cannot possible respond fast enough, because every innovation has to be considered and ruled on. In the English tradition, by contrast, you can innovate as much as you want unless or until it infringes other people's rights. Facing the international competition that we do, that seems a much more promising system.

Young Writer on Liberty Competition 2014

The Adam Smith Institute invites you to enter our annual student competition, Young Writer on Liberty. This year's theme is:

Three policy choices to make the UK a freer country

Each entrant must write three essays in the style of the ASI blog, each no longer than 400 words, and each explaining a different policy choice that could make the UK freer, richer and happier. No policy choice is out of the question—indeed counterintuitive policy choices may be particularly interesting if backed up by strong arguments.

The winner will receive £250 and have their three posts published on our blog. They will also get a box of liberty-themed books and the opportunity to do two weeks of work experience here at the ASI.

Twos runner-up will also have their posts published on the blog, as well as receiving a package full of interesting books.

Last year's winner was George Kirby, who argued that we should legalise markets in organs, that there should be greater roaming rights in the UK, like those enjoyed in some Nordic countries, and that the UK would benefit from US-style federalism.

Entrants must be 20 or under on the closing date, 21st March 2014. Please submit all entries to schools@old.adamsmith.org. Good luck, and I look forward to reading all of your pieces!

Deregulate banks for more competition

Sometimes politicians don't know how powerful they are. The UK Labour leader Ed Miliband, for instance, seems able to cause the London Stock Exchange to plummet just by speaking. First he promised price caps on energy companies, and their shares reeled. Then last week he promised to break up the banks, whereupon billions were wiped off their value.

As Jeremy Warner tellingly observes in Saturday's Daily Telegraph, Miliband is not the first in his party to want to get tough on bankers. When Gordon Brown became Chancellor in 1997, he instructed the OFT's John Bridgeman to investigate their supposed lack of competitiveness. Bridgeman refused on the grounds that he could find no sign of anti-competitive behaviour. So Brown set up his own inquiry under former telecoms regulator Don Cruickshank. As intended, he reported that the banks must be uncompetitive because they were making so much money on their capital. But "It didn't seem to occur to Cruickshank that the more plausible explanation for high returns was that the banks were operating on dangerously small levels of capital," writes Warner.

Anyway, by the time Cruickshank reported, the banks were making so much money, and contributing so much in tax to the Exchequer, that Brown no longer wanted to break them up. Indeed, he went the other way, suspending competition rules to allow Lloyds buying the near-insolvent HBOS, a "final act of folly" which taxpayers got the bill for.

There is indeed far too little competition in UK banking. America has 7,000 banks. In Britain, four banks control about 4/5 of the banking market, and five control 2/3 of the mortgage market. That is because of too much regulation, not too little. Regulation is a fixed cost. Big firms can bear it, small ones cannot. That is why the newcomer MetroBank is the first high-street bank to be created since Georgian times.

Miliband's prescription is typically statist. He wants to break up the big banks and "create two 'challenger' banks." Why two? Why not six, eight or fifteen? How does a politician – or anyone else – know how many banks (or energy companies, or carmakers, or supermarkets, or dog groomers and cafes, for that matter) we should have?

Obviously, the best thing is to leave such decisions to the market. But at present, the market is rigged, through regulation, in favour of big firms. It is right that there should be strong capital controls on large banks: if RBS or Lloyds skate on dangerously thin capital, they could bring down the entire financial system. If some tiny bank goes down, that is unfortunate, but not catastrophic, and we can deal with it just as we deal with any other small business failure.

So the solution seems obvious: have stringent enough capital regulation on large banks, and less stringent rules on small ones. That would encourage newcomers and innovators to enter the markets – not just two "challenger" banks but potentially dozens, even hundreds. And it would encourage the larger banks to break themselves up. Which they would probably do in a way that made much more business sense than any break-up engineered by clod-hopping officials employed by Business Secretary Vince Cable or would-be Prime Minister Ed Miliband.

On why the US should have a market for kidney transplants

The second installment of my finding my extant prejudices supported by Gary Becker. This time it's his excellent article about the reasons why the US should have a paid market for kidney transplants. This is something I've written about here (and elsewhere) in our own UK experience so it's nice to see the work being done all over again for the US.

My very much back of the envelope numbers for the UK were that offering perhaps £20,000 as compensation to a live donor would reduce deaths from kidney disease and at the same time save the NHS a fortune. Beckers's (obviously, more accurate, for he is an economist and I am not) estimate is that the same results could be achieved in the US with a fee of perhaps $15,000:

We have estimated how much individuals would need to be paid for kidneys to be willing to sell them for transplants. These estimates take account of the slight risk to donors from transplant surgery, the number of weeks of work lost during the surgery and recovery periods, and the small risk of reduction in the quality of life. Our conclusion is that a very large number of both live and cadaveric kidney donations would be available by paying about $15,000 for each kidney. That estimate isn't exact, and the true cost could be as high as $25,000 or as low as $5,000—but even the high estimate wouldn't increase the total cost of kidney transplants by a large percentage.

They've also started exactly where I did: with the observation that Iran is the only place in the world without a queue for such trasnplants and Iran is the only place in the world with a paid donation program. It is possible to think that there might be a connection between these two things.

Paying for organs would lead to more transplants—and thereby, perhaps, to a large increase in the overall medical costs of transplantation. But it would save the cost of dialysis for people waiting for kidney transplants and other costs to individuals waiting for other organs.

More important, it would prevent thousands of deaths and improve the quality of life among those who now must wait years before getting the organs they need. Initially, a market in the purchase and sale of organs would seem strange, and many might continue to consider that market "repugnant." Over time, however, the sale of organs would grow to be accepted, just as the voluntary military now has widespread support.

Eventually, the advantages of allowing payment for organs would become obvious. At that point, people will wonder why it took so long to adopt such an obvious and sensible solution to the shortage of organs for transplant.

Or as I have been putting it for some years now, there are some problems that are simply too important not to use markets to solve them.

Gary Becker on bureaucracies

It's rather comforting to find one of your own heartlfelt prejudices backed up by a man with a Nobel, as I do here with Gary Becker's thoughts on the existence of bureaucracies:

Whether an organization is “efficient” cannot be defined in any absolute sense, but only relative to feasible alternatives. Therefore, it is reasonable to conclude that a large bureaucratic organization is efficient if it manages to thrive in a competitive sector; that is, a sector with easy entry of organizations with different decision-making structures. For if potential entrants were more efficient than the bureaucratic organizations, they would enter the sector and out-compete the bureaucracies.

Banks, oil companies, and manufacturers of large building equipment, to take a few examples, are in industries without major artificial restrictions on entry of competitors. Large bureaucratic firms, such as Caterpillar, JPMorgan Chase, and Exxon, persist profitably in these industries, sometimes alongside much smaller firms, like small banks, small equipment companies, and wildcat oil drillers that are generally more nimble. The persistence of these large bureaucratic companies suggests that their net advantages, taking into account their greater rigidity, are sufficiently great to enable them to survive the competition of smaller and more flexible firms. This is an application of the “Survival Principle” approach to efficiency developed decades ago by the Nobel economist George Stigler (see his article, “The Economies of Scale”, Journal of Law and Economics, October, 1958).

We might want to make sure that these firms are not using size in order to influence the regulatory environment, thereby gaining rents of course. But yes, this is a point I have made here several times, that as long as we have a market in organisations then we don't have to worry too much about which type of organisation is doing whatever job.

We can also extend this a little by thinking of Coase's "Theory of the Firm" where he points out that whether something is done by a firm, rather than a network of contracts (and by extension, by a firm, a bureaucracy or whatever) shouldn't particularly bother us. For, given the technology available at that time and place we'd expect competition to give us the most efficient method of performing that task. The organisational form therefore becomes a function of the technology available, market competition being the thing that adjusts such organisations.

Make sure we have ease of entry into a sector and we can pretty much leave the rest of it alone.

We're still left with the problem of why there's only one government at any time of course but that's a rather more intractable problem. Perhaps best solved by making sure that we've ease of exit from its clutches.

Bubbles and balloons

Quite a few people criticised the title of my last post — There was no British housing bubble — on the basis that, even if there was no overconstruction of housing (and thus no Austrian-style distortion in the structure of production), there was a bubble in the sense that prices rose rapidly, and so on.

But is this right? I suppose it depends on what you mean by a 'bubble'. As far as I can tell, there are at least three different meanings of the word 'bubble':

1. A speculative bubble, like the Beanie Baby craze. As Arnold Kling put it recently, "If investors who are buying the asset have estimates of the discounted present value of the income from that asset that imply a negative real return, then it is a bubble."
2. An Austrian-style bubble that distorts the real economy by incentivising production in an area where much of the demand is illusory (typically created by credit expansion, according to the Austrians).
3. A government-created rise in price above 'real' (or endogenous) factors.

Take the third kind of bubble, which I think is what we are currently seeing in the British housing market. A ban on the construction of new houses would cause the price of housing to rise significantly, for instance (and this isn't a million miles away from current government policy). Though the government policy is probably very harmful, given that it exists it is perfectly rational for markets to drive the price up, and that price should stay up for as long as the political factors dictate. The policy might be crazy, but the market's reaction isn't.

Let's take a look at historical UK house prices (in real terms).

Clearly, prices were above trend in the 2000s and then fell after 2008, but compared to the early 1990s prices are still extremely high. I'm willing to believe that quite a bit of that rise was a type-1 or type-2 bubble, but unless you think we're still in the midst of that kind of bubble (which could pop at any time), it's not the whole story and doesn't even seem to be most of the story. (As some commenters have pointed out, some aspects of this price increase were likely attributable to foolish financial wizardry, probably driven by regulation.)

More likely, that rise in house prices since the 1990s, since it is still high, is a type-3 bubble — a sensible reaction by markets to foolish government policies constraining the construction of new homes. I can't explain why this rise only took place in the 1990s (population growth and decreases in household sizes may explain this, but I don't know), but unless you're saying that right now markets are wrong and you know better, that rise doesn't seem like the sort of unsustainable bubble that leads to sudden crashes.

Type-3 bubbles are different to type-1 and -2 bubbles in that they do not run the risk of sudden crashes. A type-3 bubble is created by government fiat and it can only be undone by government fiat. This difference is sufficiently great that I suggest a new term for type-3 bubbles: "balloons". A term like that might communicate the fact that prices have been blown up by human agency and, unlike bubbles, require an active popping or disinflating before they go away.

It could be that climate change just isn't worth worrying about

As you all know I'm perfectly willing to go along with the idea that climate change is indeed a problem that we are doing something about and that that something should be a carbon tax. All of this being based on the dual points that I know nothing about the science of all of this but a great deal about the economics. So, if the scientists tell me that it's happening then OK, here's what we should do about it.

And it's worth noting that this makes me entirely mainstream: think of that, a subject where Worstall is in fact entirely mainstream. It's what the Stern Review says for example.

However, the next IPCC report may well end up with my changing my views on this. Here's a taster from a recently leaked version:

Containing the concentration to 480 ppm “would entail global consumption losses” of 1 percent to 4 percent in 2030. That range would rise to 2 percent to 6 percent in 2050 and then to as much as 12 percent in 2100 when compared with scenarios that don’t involve fighting climate change, according to the document.

The only argument in favour of doing something about climate change is that not doing something will be even more expensive than doing something. And the calculation was, from the Stern Review, that we should be willing to spend 1-2% of global GDP each year in order to avoid a near catastrophic 20% decline in it when the changes occur. But it's important to note that that 20% decline is only a possibility, even Stern didn't say it was a certainty.

But now we've got the IPCC apparently saying that we're going to be losing 12% of GDP globally in order to avert the possibility of a 20% decline. That's not a cost benefit analysis that makes sense.

Which leads us to a quite delightful possibility. That the next IPCC report on hte dangers of climate change is actually going to end up proving that we shouldn't do anything about climate change. For the doing things will be more expensive than the damages we suffer from not doing anything.

Probably, given that that 20% decline in GDP is indeed only a possible event, not a certain one.

And yes, I am aware that that picture of the polar bear is not one drowning because of the melting ice.

There was no British housing bubble

Marcus Nunes graphed the Housing Stock to Population ratio in the US recently, showing that housing reached something like a steady-state in the US from the mid-1980s onwards. As Philip Stephens says, “The constructing in US housing was exactly what was needed to maintain the housing-population ratio in the face of increased population growth. You cannot have an “unsustainable boom” without oversupply.”

This is what the UK looked like over this period (my thanks to Daniel Knowles for the data):

The long-term trend (black dotted line) is attributable to the tendency in recent decades to smaller households, but what’s interesting is that, not only was there no spike in the run-up to 2008, the growth of dwellings over population actually fell below the trend. This is not what we would expect to see if there had been a bubble in housing production.

Dwellings data is a little bit unreliable, though – splitting a house into two flats creates an extra dwelling – so it might be better to look at the amount of new houses that were actually built. Here’s a chart showing the number of residential construction permits granted over the past forty years:

And here’s the ratio of new residential construction permits over population across the same period:

These charts show that housing construction was actually well below historical levels in the 1990s and 2000s, both in absolute terms and relative to population. It is difficult to see how someone could claim that the 2008 bust was caused by too many resources flowing toward housing and subsequently needing time to reallocate if there was no bubble in housing to begin with.

What this suggests is that the Austrian story about the crisis may be wrong in the UK (and, if Nunes’s graphs are right, the US as well). The Hayek-Mises story of boom and bust is not just about rises in the price of housing: it is about malinvestments, or distortions to the structure of production, that come about when relative prices are distorted by credit expansion.

What did cause the crisis? Jeffrey Friedman has shown that bank regulation (most notably, the Basel accords) was one of the major factors that led to the financial crisis, and Robert Hetzel has outlined a convincing theory that central bankers’ tightening of monetary policy in early-to-mid 2008 was the overriding cause of the world’s economic collapse. There is also the possibility that financial investment in the housing market was a simple error.

I was once convinced that the Mises-Hayek story about the boom and bust was true, but the evidence does not seem to bear this out.

Update: A lot of people seem to be implying that Austrian Business Cycle Theory (ABCT) means: Easy money -> high prices ("bubble") -> bubble burst, people lose money. This is incorrect. ABCT relies on distortions to the structure of production (that is, the "real" economy) which have to be liquidated over a period of time following the point at which it becomes clear that they are not good investments. If a 'bubble' just meant that people had lost money it would not cause a long-running recession, it would just mean that overnight a lot of people had lost money (like a stock market crash). The reason the recession takes time according to the ABCT is that resources have been invested in a sector where price signals take a considerable amount of time to adjust after a credit-induced malinvestment bubble and so it takes a while for people to determine which investments are 'mal'.

In short: There may have been a price bubble in British housing market, but there was not the production bubble that ABCT predicts.

PS: I am interested in seeing these data for countries like Ireland and Spain, where the Austrian story may be more valid. It is also possible, as Anton Howes has pointed out, that a regional breakdown would show that there were bubble-like expansions in housing supply in certain parts of the UK, which the country-wide figures hide. If you have these data please let me know, either in the comments or by emailing me at sam@old.adamsmith.org.