Recycling seems to have become a continental religion more than anything else

Apparently we're simply not recycling enough these days:

Every home in the country will have to cope with compulsory rubbish recycling schemes by next year, according to papers released by ministers yesterday. Instructions prepared for councils have revealed a move to bring in separate collections of paper, metal, plastic and glass in order to meet recycling targets set by Brussels. This will mean that many homes will need more bins and any local councils which have clung to traditional weekly bin rounds – there are thought to be around 100 in England and Wales – will have to establish compulsory recycling systems.

We can and should divide recycling into three different and distinct tyeps. There's the recycling that makes a profit at standard market prices. We've been reycling gold on these grounds for many millennia now, old cars are melted down to make new ones and so on. That there's a profit to made in doing this shows that value is added by doing it: the addition of more value meaning that we're all getting richer. This is fine, in fact it's just great.

Then there's recycling that costs vastly more than is gained from having done it. You can recycle just about anything if you expend enough energy on it but no one would advise trying to turn used concrete back into Portland cement. Better by far to bake some more cement and put the rubble into the hole we've just dug.

There's also the class of things where the pure market numbers don't provide a profit but we'd like to recycle for other reasons. When there's an externality perhaps. Cleaning up a radioative waste site might not be profitable for the metals extracted from it but it could still be something we want to do anyway.

The danger is that we get confused about those possible other reasons. And then end up deciding that we should pursue that second, highl;y detrimental, type of recycling. And that's where the "recycle everything" movement is today. It's become an almost religious observation, one that's continent wide, that recycling stuff is a good thing to do in and of itself. But there's no actual reason to do this. There's no shortage of holes in the ground to put landfill into, only a shortage of licenced holes. There's no general shortage of resources for us to make new stuff from. But we are told that we must recycle ever more material, well, just because we must recycle ever more material.

We should take a step back from this sort of emotional observance and recycle only that which makes a profit. But trying to be rational about even secular religions never does get us very far, does it?

This craze for organic stuff is terribly dangerous you know

As we all know the internet was originally built so that we could propitiate Bastet by sending cat pictures to each other. So thus a picture of a cat.

But there is another reason for this image, which is to show quite how dangerous this obsession with organic materials is. For someone deciding to use organic kitty litter, instead of the required inorganic, might just lead to the closure of one of the world's radioactive waste depositaries. At a possible cost of $7.5 billion. To say nothing of the costs of climate change if we all stop using nuclear power as a result of being unable to get rid of the waste. Which is, when we look at it, quite a high cost of someone trying to go organic.

The background is that when you've got certain solutions containing radioactive particles you want to make sure that they're not going to dry out. For if they do they might go bang: and bangs with radioactive material are something that we'd rather enjoy avoiding. One of the things that can stop thing bangness is the use of kitty litter:

Nitrate salt solutions can ignite when they dry out – which is why it’s tricky working with nitrate solutions in the lab and why you need to make sure they don’t dry out, something many a chemistry student has found out the hard way. So you need to stabilize nitrate solutions before they dry out, or prevent them from completely drying out. Traditional cat litter is made from various inorganic geologic silicate minerals like diatomaceous earth, zeolites or bentonites, materials that are excellent in absorbing and stabilizing chemical species like nitrates, ammonia, and urea. This is the very reason we use minerals for cat litter. Unfortunately, someone working with this waste, before it was to be shipped to WIPP, used a new “green” cat litter, made with materials like wheat or corn. These organic litters do not have the silicate properties needed to chemically stabilize nitrate the correct way.

One of the barrels of waste, that had already been put into the depositary, has gone bang as a result of this new and unapproved ingredient. That's not too bad: the correct use of robots means that it is potentially feasible to clean up the mess. The problem is, well, how many other damn fool hippes have we had filling up all of the other barrels?

There's undoubtedly a time and a place for desiring things to be organic: that Welsh hill lamb or that grass fed beef are certainly worth chasing across the plate. But there are also times when the obsession becomes rather dangerous. This would appear to be one of them.

Isn't this nice? Crimea will adopt English law

This is an interesting little snippet of news. Crimea is going to adopt English law:

Lawmakers in Moscow are working on a draft bill that will offer tax and other incentives to stimulate exports, according to Savelyev, the minister for Crimea. Businesses there will operate under English commercial law rather than Russian legislation to attract foreign investment, he said.

Obviously they're not adopting English electoral law, nor that on referenda and the like. But it's an interesting observation they've made: that part of what generates a thriving and entreprenuerial economy is that English commercial law. I very much doubt that they'll get it right mind, but at least it's a start. For the cornerstone of that English law is that as long as there's no law against it then you can do as you wish. This isn't something that accords well with the pysche of those who have ruled Russia in the past it has to be said.

Back when the Soviet Union was newly dead Anatoly Sobchak, the Mayor of St Petersburg (and Putin's mentor) decided that you no longer needed any permits from City Hall to start up in business. Just send us a letter telling us what you're doing so that we can set up the tax system for you. The next day the office was thronged with those seeking the permit that they'd need not to have any permits. The idea of really needing no permits seemed not to be believable.

Two further things: having English commercial law will be all very well but you do also need to have English courts and the English enforcement of those laws. And the second is that wouldn't it be so lovely if our own rulers recalled the basis of our legal system which is they get to tell us what we may not do but then they have to stay silent on what we may.

Liberalism day is 16th June

Monday 16 June has been chosen as Liberalism Day. The idea is to recapture the world 'liberal' from the American left – who, with their extravagant plans for government spending and taxation are far from Liberal in the true sense. As Milton Friedman put it in his 1955 article, Liberalism, Old Style:

"Liberalism, as it developed in the seventeenth and eighteenth centuries and flowered in the nineteenth, puts major emphasis on the freedom of individuals to control their own destinies.... Liberals favoured free competition at home and free trade among nations. They regarded the organisation of economic activity through free private enterprise operating in a competitive market as a direct expression of economic freedom and as important also in facilitating the preservation of political liberty."

That is all a far cry from American 'liberalism'. as the term has been used since the 1930s. That is not about free competition and individuals controlling their own lives, but about the New Deal era of public works, Lyndon Johnson's Great Society and direct market interventions like the Community Reinvestment Act (which kicked off the whole sub-prime mortgage debacle) and Barack Obama's recent, forlorn, efforts to completely reconstruct the healthcare sector, not on market principles (which it sorely needed) but according to the political conception of himself and his party.

Liberalism is a perfectly good word, but it does not actually mean anything like all that. it is about time that we Liberals took back out own word, without having to quality it by the foreword 'Classical' or the afterwords 'in the European sense'. Check out the website, and tweet the hashtag #LiberalismDay on or around 16 June.

QE boosts equities by boosting fundamentals

Many people suggest that the recovery in equity prices since 2009-2010, seen around round the world but particularly in the American Nasdaq, S&P500 and DJIA, does not represent a general economic improvement. Instead, they believe that these numbers are simply being buoyed by new money pumped into the system. I don't think this argument holds, and I will attempt to explain why. First let's consider why we think people hold equities. Essentially, people hold equities because they expect a given real return for a given risk profile. In our simplest model, people hold portfolios of assets based on their risk tolerance, their subjective judgements over probabilities, and their preferences. Adding in banks, insurers, pension funds and so on makes the overall picture more realistic, but doesn't change our theory much. People pick financial intermediaries that hold the assets according to our preferences—the intermediaries add value through scale, or through providing a payments system and settling accounts.

Why might electronic money printing (which we call "quantitative easing" or QE) affect equity prices?

Well, firstly, we might not expect an effect from quantitative easing under one circumstance. QE increases the amount of narrow money we have—that is the number of notes, coins and bank reserves in the system. Generally we think broad money—which includes bank accounts people can debit or write checks on, and is much, much larger—is what interacts directly with the real economy. The ratio of broad money to narrow money is called the money multiplier, and usually a rise in narrow money leads to an even bigger rise in broad money—but this multiplier is not stable. It's at least possible (although not historically typical) that a rise in narrow money could be completely counteracted by a fall in the money multiplier.

But assuming this doesn't happen, there are three reasons why QE might boost equity prices. First would be because it increases inflation and the future price level. If prices rise, cash is worth less, so relative to a given nominal amount of cash, all things being equal a given equity is worth more. In other terms, the firms' nominal expected returns would rise.

The second reason is that in a depressed economy monetary easing like QE may boost real growth, which we would expect to raise any given company's expected real returns. It might also reduce the risk of very bad economic outcomes. Since equities are riskier than bonds, gilts and cash they pay a risk premium to those who hold them—a higher return (lower price) to compensate for this. If risky outcomes in general become less likely, these risk premia might narrow, making equities more desirable and expensive.

The third reason QE might raise stock prices is because it increases overall social wealth, and thus may lead to greater risk-tolerance overall, if people are willing to bear more risk as they get wealthier, and thus shift towards riskier assets like equities.

In each of these three, the jump in equity prices comes from fundamental factors. One could certainly drive up stocks by creating lots of inflation, but we can easily check if that's what's happening by looking at inflation. Any real/relative growth in equities would refute that explanation. In contrast, real growth, reduced risk and shifted preferences due to extra wealth are all legitimate reasons for higher equity prices.

Accounts of why QE buoys stocks without improving fundamentals (and hence part of the argument that stock indices are not good proxies for economic health) tend to rely on a narrative that QE "flows into equities". But as explained, people try to hold their wealth in the portfolio that fits closest to their preferences. If QE money did "flow into equities" then people would now be holding more of their wealth in stocks than they wanted to—they would rapidly rebalance their portfolio. Typically people needn't even do this themselves, because their pension fund will do so for them. QE has to improve the fundamental factors in order to boost equities.

The Negative Income Tax and Basic Income are pretty much the same thing

I’ve been talking about the Negative Income Tax lately, and equating it with the idea of a Basic Income. I think most of the policies’ respective advocates would deny that they’re the same policy. In this post I’m going to outline why that’s incorrect and I’m happy to say that they’re basically the same thing. For the uninitiated, a Negative Income Tax is a form of welfare that replaces most existing welfare schemes with a single payment that supplements the income of the unemployed and low-paid. The payment is withdrawn as your earnings increase, ideally at a gradual enough rate that increasing your earnings (and hence reducing leisure time) is always worthwhile.

An example: a £5,000 basic payment at a 50% marginal withdrawal rate (this means that for every additional pound earned, the worker will receive 50p less in NIT payments). Someone with an income of zero would receive an NIT payment of £5,000, or just under £100/week. If they took a job that paid £5,000/year, they would receive a top-up of £2,500/year; that paid £7,500, a top-up of £1,250/year. Once they reached £10,000/year, they would receive nothing in NIT.

This idea was supported by Milton Friedman, among others, and has a reasonably strong pedigree on the right. Even libertarians who object to income redistribution in principle usually concede that a Negative Income Tax is the least bad form of welfare, because it is administratively simple and perverts incentives less than most welfare schemes. It is particularly appealing to many liberals and libertarians because it is unpaternalistic.

A Basic Income, on the other hand, is usually conceived as a flat payment to everybody irrespective of circumstance. This leads to a very big problem: assuming it replaces most forms of welfare as an NIT does, a basic income high enough for unemployed workers to subsist on would simply not be affordable to pay to everyone. A policy that ideally would be designed to help the poor ends up being a very expensive subsidy to people who do not need extra money.

Advocates of the Basic Income recognize this, and their solution is typically to use the tax system to ‘claw back’ the payment from relatively high earners. So everyone gets the money, but it is withdrawn according to earnings.

In practice, that’s more or less the same as a Negative Income Tax – the only difference is whether the withdrawal takes place at the ‘front’ of the payment (as with the NIT), or the ‘end’ (as with the Basic Income). Strange as it may seem, the policies advocated by Milton Friedman and the Green Party are the same in all but the technical detail.

But even if there is a surprising amount of agreement in terms of the kind of welfare we’d like to see, the detail may be more difficult to agree on. How much should a ‘basic income’ be? When should it begin to be withdrawn, and at what rate?

Questions like this are, I think, likely to be where what breaks up this (unholy?) alliance. But maybe not. Traditional policies like the minimum wage probably do more harm than good, and, rightfully, the question of how to improve the lives of the low paid does not seem to be going away. It will take compromise, but in the Negative Income Tax / Basic Income, we may have an answer.

It's amazing what we can learn from nature really

The latest news on the climate change front is that those melting glaciers in Antarctica and Greenland actually, by melting, aid in reducing the effects of climate change. Which is an interesting little thing we can pick up from our observation of the natural world around us. The reason is that the water, as it gushes over the rock underlying the ice, picks up a certain amount of iron. And we also know that there are areas of the oceans which do not have enough iron to sustain life (much of the deep ocean is actually a "desert" in that is has next to no life at all). So, iron in meltwater meets iron deficient areas, plankton blooms and some of that sinks to the ocean floor to, in time, become the sort of rock that Beachy Head is made out of.

Huge amounts of dissolved iron currently being released into the oceans from melting ice sheets might cancel out some of the negative effects of global warming, it has been claimed. A UK team has discovered that summer meltwaters from ice sheets are rich in iron. This can cause an increase in growth of phytoplankton - which capture carbon, they say.

This has all long been known to be possible, this is just a confirmation that it happens, through natural factors, more than we previously thought it did. But this poses another little problem. Chatting around to various scientists it's easy enough to find out that research has been done into artificially boosting the amount of iron that can be dumped into the oceans to create these blooms. And that it would be, in the words of one "ludicrously cheap" and could sequester, for geological time scsales, some 1 billion tonnes of CO2 emissions each year. Or about twice current UK emissions.

Quite seriously all that would be needed is a few ships tossing some ferrous sulphate over the side, something that any number of industrial processes would be delighted to give you for free.

Which leaves us with our little question, or perhaps two of them. Given that, from the political rhetoric at least, climate change is the most pressing problem of our times, a threat to our entire species, why was the last research into artificial boost to ocean iron levels this done a decade ago? And further, why would it be illegal to simply go out and do this? Who wants to stop a cheap and viable solution to at least some part of climate change and why?

Some things about equality that Piketty should know

Dr Arthur Shenfield (1909-1990) was a distinguished scholar and a valued member of the ASI's Academic Board.  In 1981 he published "Myth & Reality in Economic Systems," based on a lecture series.  The essay "Morality and Capitalism" is very pertinent today, given the recent claim by Thomas Piketty that capitalism must lead to widening inequality.  It is worth reading Shenfield, not least for his pithy turns of phrase:

Thus it ill becomes socialists to assail the inequality of capitalism for, once achieved, socialism produces inequality more gross and obnoxious than anything observable in a developed capitalist country.  However, since there is some merit in a wide degree of a fairly equal condition insofar as it does not hinder desirable incentives of varieties of life styles, it is important to consider which kind of system is most likely to achieve it. The clear answer is capitalism.

Socialism ostensibly pursues equality but produces inequality.  Capitalism pursues liberty but in the process also reduces inequality.  We have already noted that in capitalism wealth comes to those who serve the masses.  Thus in capitalism the inequality of condition is little more than the difference between the Cadillac and the Chevrolet, the Parisian couturier's model and the excellent mass-produced copies of it, caviar and the equally nutritious cod's roe. In pre-capitalist societies it was the difference between the mansion and the hovel, between silks and rags, between exquisite luxury and frequent famine.

In socialist societies it is between the luxurious country villa and the miserable worker's flat, between the special shops carrying high-quality goods imported from capitalist countries reserved for the Party elite and the endless queueing for the shoddy products of socialist industry imposed on the masses.

Richard Murphy's excellent argument for a lower overall tax burden

We here at the ASI have to be very selective in our mentions of Richard Murphy, the crusading tax campaigner. His normal output is such a target rich environment that we could spend entire working lives correcting his errors and misapprehensions. But there are times when he manages to, through some form of serendipty perhaps, get things right and it's worth our pointing to those happy events when they occur. So it is with his recent observation that, given that the collection of taxes is a burden upon both business and the citizenry then therefore we should work to lower that tax burden:

If, through its neglect, the government forces all the UK’s honest smaller businesses to compete with businesses that HMRC and Companies House are failing to regulate then it inevitably follows that the government are giving an unfair economic advantage to the cheats who do not pay their tax. No wonder as a result that the High Street is being decimated, bar the occasional fly-by-night pop up shop. And no wonder young people cannot find the jobs and apprenticeships they need with local employers when those honest enough to invest in jobs for those young people are likely to be competing against rogue traders who do not charge VAT on their sales and pays cash in hand wages.

As he points out that collection of taxation leads to the decimation of the High Street, to the young, the future of the nation, being wasted on the scrapheap of untrained unemployment and no doubt to many other horrors as yet unmentioned. The solution therefore is clearly to reduce that economic birden of those taxes. As we here at the ASI have been saying for some decades now: reducing the burden of taxation is a desirable thing in and of itself of course, but also because it will make the nation richer.

No doubt Murphy's next missive will include the evidence that he's got this point: for no one could, as he has pointed out, note that tax is a burden without then arguing that the burden should be reduced.

Could they?

Five intriguing papers I discovered this week II

As the second in a series, here are summaries of five interesting journal articles I read in the last week. All of these ones are new, although that may not always be the case. 1. "Very Long-Run Discount Rates" by Stefano Giglio, Matteo Maggiori and Johannes Stroebel

Giglio et al. use the difference between the prices of leasehold and freehold properties in the UK and Singapore to compute long-run discount rates. They find that over 100 years, the discount rate is 2.6%—whereas properties with 700-year or longer leases trade at par with freeholds. They point out that this 2.6% discount rate may have implications for climate change policy; the famous and influential Stern Review recommended using a 0% discount rate, which may justify much more extensive anti-CO2 measures now. Some slides explaining their findings are available here.

2. "Is the stock market just a side show? Evidence from a structural reform" by Murillo Campello, Rafael P. Ribas, and Albert Wang

Campello et al. look at a 2005 reform that, in a staggered 16-month basis and after a trial, allowed $400bn worth of Chinese equity, previously untradable, to be bought and sold. Using "wrinkles" in the roll out that provide quasi-experimental tests, they find that firm profitability, productivity, investment and value all improved substantially. "Policies that ease restrictions on [capital] markets may have positive effects" runs the final line of their conclusion—quelle surprise!

3. "Social security programs and retirement around the world: Disability insurance programs and retirement" by Courtney Coile, Kevin S. Milligan and David A. Wise

These three authors add to the burgeoning literature proving that those on the edge of retirement respond to incentives just like anyone else. This shouldn't really be a surprise, but the heavy flow of publications adding evidence in this direction suggests that maybe there was once a bizarre consensus in the other direction. Coile et al. show that delaying eligibility to pensions, increasing the stringency of disability insurance programs, and other welfare reforms for older people have "very large" effects on how much labour they decide to supply. Not exactly shocking, but certainly important in ageing societies.

4. "What Happens When Employers are Free to Discriminate? Evidence from the English Barclays Premier Fantasy Football League" by Alex Bryson and Arnaud Chevalier

In this nifty and quirky paper the authors try and isolate "taste-based" racial discrimination, by looking if fantasy football players pick footballers differently based on their race, controlling for "productivity" (i.e. their expected points tally). They find no evidence of taste-based discrimination here, suggesting that much of the apparent discrimination found in other studies (e.g. studies of fake CVs where different ethnicities see different acceptance rates even when they have similar qualifications and experience) could be statistical. That is, since employers cannot directly observe productivity (unlike in fantasy football), and since different ethnicities have different productivity distributions, certain ethnicities are on average less valuable to employers. Of course, it might be that people exercise taste-based discrimination as well when they have to interact regularly with the group/race/ethnicity in question—fantasy football is much more at arms length.

5. "The Role of Publicly Provided Electricity in Economic Development: The Experience of the Tennessee Valley Authority, 1929–1955" by Carl Kitchens (ungated)

The most fun kind of research to read is one that confirms a niggling view you've had for a while, but one that nevertheless overturns a happy consensus. The Tennessee Valley Authority is a classic example of "enlightened" central planning, targeting a hard-up area with massive coordinated infrastructural investment and widely believed to have delivered substantial benefits. But if these dams and systems were really such good investments wouldn't private companies have got around all the barriers to such an investment already? There are some cases where I suppose that sort of basic argument doesn't hold, but it's a pretty good first approach to any area, and it turns out the TVA is one of them. Kitchens newly-published paper finds "that the development of the TVA during its first 30 years did not cause manufacturing, retail sales per capita or electrification to grow any faster in areas receiving TVA electricity than in other areas in the Southeast."