Isn't this an interesting little finding about drugs?

Isn't this an interesting little assertion from one of the government's own reports?

Decriminalising drugs would have little effect on the number of people abusing illegal substances, a highly controversial Home Office report has said. ... The report – which sources said had caused “panic” within the Home Office – said: “There are indications that decriminalisation can reduce the burden on criminal justice systems.

“It is not clear that decriminalisation has an impact on levels of drug use.

"The disparity in drug use trends and criminal justice statistics between countries with similar approaches, and the lack of any clear correlation between the ‘toughness’ of an approach and levels of drug use demonstrates the complexity of the issue."

The point being, and this can be readily verified by anyone with even the most modest experience of social life in Britain, that all those who want to consume drugs are currently easily able to find the drugs they wish to consume. Meaning that the illegality isn't particularly affecting the availability of supply. Thus decriminalisation seems like a good idea as it's not going to lead to half the population toking itself into a stupor.

However, that decriminalisation isn't enough as we've mentioned around here before. For the major danger of drugs comes not from they themselves, but from the fact that purity and concentration are, given that they are illegal products, entirely unknown to the user. Overdosing is thus depressingly commonplace, as are all sorts of diseases and illnesses from the admixtures. Thus we need to be thinking very seriously about legalisation: not just decriminalisation of small amounts for personal use but the legalisation of supply and production. For that is how we would get brands, reliant upon their quality and consistency, and also get a transparent supply network that can be checked for quality.

It's not just the criminality of taking drugs that is causing our current problems, it's the illegality of supply as well.

What Robert Peston gets wrong about QE

I don't usually read Robert Peston, now the BBC's economics editor, but I came across this piece he wrote for their website on the end of the ongoing US quantitative easing (QE) programme. Here he makes the case, overall, that even though QE did not cause hyperinflation (yet!) it could still prove 'toxic' because it 'inflates the price of assets beyond what could be justified by the underlying strength of the economy'. Basically every line of the piece includes something that I could dispute, but I will try and focus on the most important issues. The first problem is that Peston takes a hardline 'creditist' view that not only is QE mainly supposed to help the economy through raising debt/lending, but by raising it in specific, centrally-planned areas (e.g. housing). When we find that QE barely affected lending, it seems to Peston that it failed. But QE does not raise lending to raise economic activity—QE raises economic activity through other channels, which may lead to more lending depending on the preferences of firms and households.

In his 2013 paper 'Was there ever a bank lending channel?' Nobel prizewinner Eugene Fama puts paid to this view. He points out that financial firms hold portfolios of real assets based on their preferences and their guesses about the future. QE can only change these preferences and guesses indirectly, by changing nominal or real variables in the economy. For example, extra QE might reduce the chance of a financial collapse, making riskier assets less unattractive. But when central banks buy bonds investors find themselves holding portfolios not exactly in line with their preferences and they 'rebalance' towards holding the balance of assets they want: cash, equities, bonds, gilts and so on. This is predicted by our basic expected-profit-maximising model and reliably seen in the empirical data too. It's good because it implies that monetary policy can work towards neutrality.

This doesn't mean Peston is right to be sceptical about the benefits of QE. QE has worked—according to a recent Bank of England paper buying gilts worth 1% of GDP led to .16% extra real GDP and .3% extra inflation in the UK (2009-2013), with even better results for the USA. The point is that it works through other channels—principally by convincing markets that the central bank is serious about trying to achieve its inflation target or even go above its inflation target when times are particularly hard. This is not an isolated result.

The second issue is that Peston claims QE isn't money creation:

Because what has been really striking about QE is that it was popularly dubbed as money creation, but it hasn't really been that. If it had been proper money creation, with cash going into the pockets of people or the coffers of businesses, it might have sparked serious and substantial increases in economic activity, which would have led to much bigger investment in real productive capital. And in those circumstances, the underlying growth rate of the UK and US economies might have increased meaningfully.

But in today's economy, especially in the UK and Europe, money creation is much more about how much commercial banks lend than how many bonds are bought from investors by central banks. The connection between QE and either the supply of bank credit or the demand for bank credit is tenuous.

That is not to say there is no connection. But the evidence of the UK, for example, is that £375bn of quantitative easing did nothing to stop banks shrinking their balance sheets: banks had a too-powerful incentive to shrink and strengthen themselves after the great crash of 2008; businesses and consumers were too fed up to borrow, even with the stimulus of cheap credit.

This is extremely misleading and confused. He suggests that printing cash and handing it out would boost the 'underlying' growth rate, which is nonsense—the 'underlying' growth rate is driven by supply-side factors. He claims that money creation is identical with credit creation, when they are separate things, and he has already pointed out that creating money doesn't always lead to more credit. We have already seen how credit is not the way QE affects growth, despite what economic journalists like Peston seem to unendingly tell us. Indeed, it seems quite clear that the great recession caused the credit crunch, rather than the other way round.

His ending few paragraphs are yet stranger:

But the fundamental problem with QE is that the money created by central banks leaked out all over the place, and ended up having all sorts of unexpected and unwanted effects. When launched it was billed as a big, bold and imaginative way of restarting the global economy after the 2008 crash. It probably helped prevent the Great Recession being deeper and longer. But by inflating the price of assets beyond what could be justified by the underlying strength of the economy, it may sown the seeds of the next great markets disaster.

It's not clear at all why Peston thinks that QE would inflate asset prices beyond what could be justified. I've written at length about this before. The money a trader gets from selling a gilt to the Bank of England is completely fungible with all their other money. There is no reason to expect they will put this money in an envelope and save it for a special occasion. They try and hold the same portfolio of assets as they did before. Through various channels (including equity prices -> investment) QE raises inflation and real GDP and surprise surprise these are exactly the things that asset prices should care about.

Now Screening: A tragic drama of the London Living Wage

After months of campaigning, no less than 13 strikes and support from the likes of Ken Loach and Eric Cantona, Brixton Ritzy Picturehouse cinema staff have finally secured a commitment to be paid the London Living Wage.

Unfortunately, this means that a quarter of the payroll is now facing the sack:

Picturehouse Cinemas said that the cost of increasing basic wages at the Ritzy Cinema in Brixton to £8.80 an hour would be absorbed by reducing the number of staff by at least 20, with a redundancy programme starting next month.

Two management posts will be axed along with eight supervisors, three technical staff and other front-of-house workers from its workforce of 93.

Naturally, Owen Jones has some insight into the situation:

The message appears transparent: if you fight for a living wage and workers’ rights, then you face the sack. Or we will crush you if you dare to stand up for yourselves.

In fact, the message is even more clear than this. If wages are set higher than it is productive or profitable to do so, the firm will have to account for the cost in other ways. We often talk about the unintended consequences of things like price controls and wage demands, but in this case the consequence of such a pay rise was pretty damn clear. As the Picturehouse explains:

During the negotiation process it was discussed that the amount of income available to distribute to staff would not be increasing, and that the consequence of such levels of increase to pay rates would be fewer people with more highly paid jobs.

The Ritzy previously paid staff £7.53 an hour with a £1/hr customer satisfaction bonus—far higher than the National Minimum Wage of £6.31, whilst union pay negotiators pointed out the Ritzy staff do actually like working there. This makes the idea that job cuts are bitter, tit-for-tat 'payback' seem rather perverse. Indeed, to make something sound so heartless and threatening when it is basically Econ 101 is bordering on the petulant.

 In a perfect world low pay simply would not be an issue. In the meantime if employers can afford to give the LLW (or can benefit enough from the PR!), then fantastic. But paying 93 staff £8.80 an hour is no small commitment, and unfortunately pushing company policy in one direction all too often means something's got to give elsewhere.

Whilst the effects of a National Minimum Wage aren't always easy to spot, this is a concrete example of the London Living Wage actively putting Londoners out of a living. In personal experience Ritzy employees are friendly, intelligent and helpful, but sadly that's no guarantee of them getting another job. And if unions continue to push for the LLW in such an aggressive manner, this is unlikely to be the only casualty.

Curzon cinemas have just announced that they will pay their staff the LLW, even though it is loss-making. They say they hope that the cost will become self-financing through the better quality of work which paying people more will achieve. It will be interesting to see if that's the case.  In any case—grab the popcorn, this show's going to get interesting...

From the Annals of Bad Research: rock stars die younger

Around here we're all culturally savvy enough to have heard of the 27 Club: the list of those rocks stars who have died or drink, drugs, suicide etc at the age of 27. We've always taken this to be a rather cheery finding: that if you give some 18 year old all the money, booze, drugs, success and sex they could possibly want then it still takes them 9 years to kill themselves through overindulgence. Rather puts into perspective the prodnoses complaining about our having a second glass of sherry before dinner. However, we've just had the release of a report indicating that popular musicians do indeed die younger, on average, than the general population. And thi8s really should be included in our compendious volume, The Annals of Bad Research. For the contention is that the average age at death of rock and roll, rock and pop, stars is lower than that of the general population. But as Chris Snowden points out, we cannot actually know that:

You see the problem here, I expect. Rock stars didn't exist until the 1950s and since many of them are still alive, we don't know what their average age of death is. It wouldn't be at all surprising if they die earlier on average, but the graph above tells us very little about whether this is so. When Chuck Berry (aged 88), Jerry Lee Lewis (aged 79) and Little Richard (aged 81) pop their clogs, the average is going to go up, especially if they keep breathing for another twenty years.

And, who knows? They might. Perhaps the higher risk when young is counter-balanced by the boost to longevity of having lots of money and the best healthcare in old age?

Be that as it may, you clearly can't work out the average lifespan of a rock star until at least the first generation of rock stars are dead.

Quite: you can only work out the average age of death of any particular cohort when all of that particular cohort are dead. If you try to do it before that has happened then you'll be counting all of those who die young but not all of those who don't: meaning that what you've actually calculated is the average age at death of those who die young. And, you know, people who die younger die younger isn't really all that amazing of a research finding.

Breaking news: Paul Ehrlich still wrong about population

There's a story floating around about how new studies show that even if there's another world war, or some mass pandemic, the human population of the world is going to keep on rising. That's true, for most of those who are going to have children in the coming decades are already alive and we've a reasonable enough idea of how many children each of them is likely to have. The bit that caught my eye though is that the paper is edited by Paul Ehrlich. That's usually a sign that there's going to be something wrong with it. And so there is:

Amoral wars and global pandemics aside, the only humane way to reduce the size of the human population is to encourage lower per capita fertility. This lowering has been happening in general for decades (27, 28), a result mainly of higher levels of education and empowerment of women in the developed world, the rising affluence of developing nations, and the one-child policy of China (29–32). Despite this change, environmental conditions have worsened globally because of the overcompensating effects of rising affluence-linked population and consumption rates (3, 18).

It's that "despite" that grates. For while female education and empowerment are indeed correlates of lower fertility, they are not the causes. It is that rise in affluence that is behind all of the three. In a subsistence economy there is no spare capacity to educate anyone, let alone women. And a subsistence economy is also going to be a human and animal powered one, an economy in which there's not going to be much empowerment of the physically weaker sex. It's only when a society gets richer that we can all start, male and female alike, using that attribute that makes humans different, our brains, as we leave the heavy labour to the machines. and it's also that greater wealth that leads to the falls in child mortality, the education of women, those correlates of falling fertility.

That is, Paul Ehrlich is still getting the drivers of human population numbers wrong.  Not that we should be too hard on him: probably a bit late in his career for a fundamental rethink, isn't it?

Size might not matter but age definitely does

It’s ironic that politicians are so obsessed with creating jobs, given that many interventions – such as employers’ national insurance contributions and a politically determined minimum wage – achieve the diametric opposite. Yet it remains a key metric for determining political success and failure, and it drives much that passes for entrepreneurship and enterprise policy. When it comes to job creation there is a debate about whether small or large businesses contribute more. Those representing small businesses can claim that micro businesses account for around 95% of all private sector companies, while those representing large businesses can counter that despite making up less than 0.1 per cent of the total private sector stock, large businesses account for more than half of all turnover and more than 40% of UK private sector employment.

It’s a complicated debate. Nesta research suggests a small proportion of businesses are responsible for the majority of job growth, with the data showing that “just 7% of businesses are responsible for half of the jobs created between 2007 and 2010.”

Elsewhere, Nesta suggests focussing government resources on supporting what was then “the vital 6%” . But it isn’t obvious that this is the right conclusion from the data. It’s entirely possible that current polices are limiting the size of this so-called vital 6% job-creating companies. If this were the case, instead of focussing on those businesses and sectors already succeeding, the right policy would be the exact opposite: focusing on increasing that 6% figure by targeting companies not in the 6%.

Although the ideal ratio of small to large businesses might be indeterminable, we do know one thing. Size might not matter but age definitely does: we want new businesses. As the Kaufman Foundation explains: “Policymakers often think of small business as the employment engine of the economy. But when it comes to job-creating power, it is not the size of the business that matters as much as it is the age.”

Therefore, politicians and policymakers should want the entrepreneurial process to happen quickly; they should want to make sure regulations don’t inhibit the process of business creation and destruction; they should, to paraphrase the lean startup, want entrepreneurs to start fast, grow fast and fail fast.

Philip Salter is director of The Entrepreneurs Network.

Slow economic growth is the new normal apparently

So Gavyn Davies tells us over in the Financial Times:

The results (Graph 1) show an extremely persistent slowdown in long run growth rates since the 1970s, not a sudden decline after 2008. This looks more persistent for the G7 as a whole than it does for individual countries, where there is more variation in the pattern through time.

Averaged across the G7, the slowdown can be traced to trend declines in both population growth and (especially) labour productivity growth, which together have resulted in a halving in long run GDP growth from over 4 per cent in 1970 to 2 per cent now.

Obviously, for the sake of our grandchildren, we'd like to work out why there has been this growth slowdown. Fortunately, there's an answer to that:

But run the numbers yourself–and prepare for a shock. If the U.S. economy had grown an extra 2% per year since 1949, 2014′s GDP would be about $58 trillion, not $17 trillion. So says a study called “Federal Regulation and Aggregate Economic Growth,” published in 2013 by the Journal of Economic Growth. More than taxes, it’s been runaway federal regulation that’s crimped U.S. growth by the year and utterly smashed it over two generations.

A version of that paper can be found here.

No one is saying that there's not a case for regulation: there's always a case for every regulation, obviously. There's also a smaller class of regulations where the case made for it is valid: where it's worth whatever growth we give up in having the regulation in order to avoid whatever peril it is that the regulation protects us from.

But this doesn't mean that all regulations have a valid case in their favour: and one darn good reason against many of them is that we're giving up too much economic growth as a result of the cumulative impact of all of those regulations.

If we want swifter economic growth, something we do want for the sake of those grandkiddies, then we do need to cut back on the regulatory state. Hopefully before all growth at all gets strangled by the ever growing thickets of them.

David Cameron vs feminism

Today there was a minor kerfuffle about the Prime Minister’s refusal to wear a t-shirt that says “This is what a feminist looks like” after Elle, a women’s magazine, asked him to do so for a marketing campaign. Elle had a go at Cameron, saying that “It should be simple. Do you believe that men and women are equal? Do you believe men and women should have the same rights? The same opportunities? Yes? Then you are a feminist.”

Well, that sounds pretty reasonable! I don’t see how anyone could object to that. But the plot thickens later on. All these unobjectionable, bland claims apparently relate to quite specific public policy issues, like unequal pay and political representation for women. According to Elle, we need feminism because "for every £1 a man earns in the UK, a woman earns 80p. Women make up only 35% of senior managers in the UK and an estimated 30,000 women a year lose their jobs as a result of pregnancy-related discrimination. In politics, fewer than one in four MPs is a woman, and there are only five women in the cabinet out of 22 ministers".

In other words, we need feminism so we can do something about very specific issues (presumably in specific ways, since the Fawcett Society is involved which has specific policies to address all these things).

This sounds to me like a ‘motte and bailey’ argument. Scott Alexander explains in more detail in part two of this excellent essay here (if you have the time, read that, not this). The name come from medieval times, when a ‘motte’ was a defensible castle surrounded by a profitable village called the ‘bailey’. Everyone would work out in the bailey until they got attacked and had to retreat to the safety of the motte.

A motte and bailey argument starts off by defining itself in very defensible way. “Feminism means thinking that men and women should be treated equally.” That’s the safe, defensible motte.

It then extends that reasonable-seeming claim to all sorts of controversial claims – unequal political representation demands all-women shortlists; unequal pay demands more invasive laws to equalise pay between men and women. That’s the bailey where the actual (political or cultural) advancements can be made.

Let’s say you attack the bailey by saying that you're not a feminist because you think the policies advocated by feminists are bad, or the problems they identify are not even problems at all. Maybe you find, as Ben recently has, that “if you control for background (i.e. skills and talent) and exit (i.e. women staying in the workforce) women earn more than men and get more aggressively promoted than men”, which implies that the claims made by feminists about unequal pay needing new laws are simply incorrect.

Feminism may also be wrong about many other things, such as claims about men and women’s brains being biologically the same or the pervasiveness of a ‘rape culture’. These are substantive elements of what feminists define as feminism, and they may be right or wrong. It’s legitimate (albeit quite possibly mistaken) to think these claims are wrong, and hence to decline to wear a 'This is what a feminist looks like' t-shirt.

But do that and many feminists will retreat into the defensible motte, as Elle have today. David Cameron doesn’t think men and women should be equal! David Cameron doesn’t think men and women should have the same rights! Feminism is very simple!

This is dishonest and manipulative. And an open society requires honesty in political discourse. David Cameron is often accused of pandering to fashion. He deserves credit for refusing to do so this time.

Markets involve substantial fairness

I have been writing recently about how market mechanisms work against taste-based (i.e. objectionable) discrimination on grounds of race and sex. A while ago, I wrote how, even if we think that people should not be punished with bad lives for being unlucky with their upbringing or talents, we should favour some wealth and income inequality in many situations so as to achieve more overall justice.

For example, if some choose to take more leisure instead of income, then it would not be just (on egalitarian grounds) to make sure their monetary income or wealth were equal—leisure is a sort of income. Similarly, it would not be just for people with more pleasant, safe or satisfying jobs to earn as much as those with less pleasant, more risky, or less interesting jobs (on egalitarian grounds).

There is one school of thought that understands and agrees with these caveat to equality. They may even note that teachers, who are respected and admired by society, and whose jobs are largely pleasant, satisfying and risk-free should not justly earn as much as despised unhappy bankers. But in the real world they see examples where people seem to have jobs that are high in pay and low in other benefits—boring or risky or low-status. Are markets failing to compensate people in pecuniary terms for the non-pecuniary costs of their job?

According to a new paper, they are not:

We use data on twins matched to register-based information on earnings to examine the long-standing puzzle of non-existent compensating wage differentials. The use of twin data allows us to remove otherwise unobserved productivity differences that were the prominent reason for estimation bias in the earlier studies. Using twin differences we find evidence for positive compensation of adverse working conditions in the labor market.

The authors look at twins to control for 'unobservable' factors about the person—basically their productivity and how employable they are—and find that workers are paid more for doing less desirable jobs. Though it often seems like they aren't, this is only because some people (mainly people on early steps of the productivity/human capital ladder without much in the way of experience or skills) are very unproductive. Of two twins, the one with a less pleasant or more risky job gets paid more.

The unique feature of our data is that we are able to estimate specifications that also control for unobservable time-invariant characteristics at the twin pair level (e.g. place of residence, spouse’s occupation, or family situation) and the common wage growth for the twins. We find evidence for positive compensating wage differentials for both monotonous and physical work using the data on MZs (monozygotic, i.e. identical, twins). Assuming that equal ability assumption holds for MZs, the results imply that both twin difference estimates and Difference-in-Differences (combined twin difference – time difference) estimates are unbiased for MZs.

I am perfectly comfortable with arguments that differences in endowments (basically upbringing and inborn talent) mean that there is a case for redistribution between individuals. But it bears repeating that markets, working properly, automatically produce results that in many ways elegantly fulfil the egalitarian concerns of leftist social justice.

The answer isn’t blowing in the wind

Last week, EU leaders agreed to the next round of targets for reduction of carbon dioxide emissions: a headline target of a 40% reduction on 1990 by 2030. But rather than let the market decide how to reach this goal most efficiently, they also set a 27% target to add more renewable energy to the mix. In practice, this love affair with renewable energy means promoting wind and solar; there is little scope for new hydropower plants and large scale, practical wave and tidal power seems to be as far away as ever. There is no rational justification for this, but politicians seem to be incapable of fixing top level targets and providing a market framework to meet them.

Wind and solar power have been heavily promoted by the green lobby as the clean alternative to fossil fuels and policymakers have swallowed the bait enthusiastically. The more perceptive of them may already have realised that life is a lot more complicated than that but, for those who still need to see the light, I recommend they read a new report published by the Scientific Alliance and the Adam Smith Institute.

Wind Power Reassessed: A review of the UK wind resource for electricity generation will make uncomfortable reading for those who continue to put their faith in wind farms. The author, Dr Capell Aris, has analysed the data on wind speed and direction collected from a total of 43 sites across the UK (22), Ireland and northern Europe over a period of nine years. He then used this data to calculate the output of a fleet of wind farms.

The results will be no surprise to anyone who has looked at this topic in any detail: output is highly variable, and the entire fleet would only produce 80% or more of its rated output for about one week a year. The problem is that, however much we hear about wind being a free resource and the cost of equipment coming down, the effect of adding more and more wind turbines to the electricity grid is to push prices up with only a modest impact on carbon dioxide emissions (the whole reason for current policy) and no improvement in energy security.

If there were no arbitrary renewable energy target, governments would be free to focus on what most voters expect: providing a framework in which a secure and affordable energy supply can be delivered. If emissions are also to be reduced, the most effective measures currently would be a move from coal to gas and a programme of nuclear new build. In the meantime, the renewables industry continues to grow on a diet of subsidies, and we all pick up the tab. Getting out of this hole is not going to be easy, but it’s time the government started the process rather than continuing to dig deeper.

Martin Livermore is the Director of the Scientific Alliance.