So, what's the difference between Modern Monetary Theory and tax and spend then?

Modern Monetary Theory is all the rage these days. Slightly unfortunately it's usually referred to as MMT which can and does also stand for Magic Money Tree. And that's what the proponents think they have found. This Peoples' Quantitative Easing that is talked about is only a variation of the basic idea. Which is, simply, government just prints all the money that it wants to spend and goes and spends it. Don't worry about taxation, that's not important. But, wait! say the monetarists. Won't this cause inflation? To which the answer is:

Kelton disagrees with Romer and Mankiw on economic theory. In fact, she disagrees with just about every economist Bush or Obama ever hired about economic theory. Kelton is among the most influential advocates of Modern Monetary Theory (MMT), a heterodox left-leaning movement within economics that rejects New Keynesianism and other mainstream macroeconomic theories.

MMT emphasizes the fact that countries that print their own money can never really “run out of money.” They can just print more. The reason we have taxes, then, is not to pay for stuff, but to keep people using the government’s preferred currency rather than, say, Bitcoin. In some rare cases, consumer demand gets too high, so sellers raise prices and inflation ensues. Then, you need to raise taxes to cool the economy down. But the theory holds that this eventuality is pretty rare. James Galbraith, another MMT-influenced economist, once told me that the last time it happened was in World War I. The main takeaway from this is that you really don’t need to balance the budget over any time horizon, and attempts to do so will hurt the economy.

So, in order to reduce the inflation brought about by government spending the newly printed money with gay abandon all you've got to do is raise taxes.

At which point it's very difficult to see what's so new about the idea really. We can raise government spending by raising the tax level without the magic money tree. And if we do use the magic money tree then we're going to have to raise taxes once the politicians apply MMT (of either kind) to their pet projects. So, what's the difference? An expansion of government spending is accompanied by an increase in the tax level.

So, what's new about this?

Presumably what's different is that it's a different argument to raise taxes and have more government spending. But perhaps a difference without much meaning and certainly one that we shouldn't be stupid enough to swallow.

Could the EHRC please stop lying about the gender pay gap? Please?

Yes, another report coming down the pike telling us all that women are so terribly hard done by in this grossly discriminatory and patriarchal society of ours. When the number used to prove this all to us is one that is known to be wrong, one that is in fact a statistical lie. From the EHRC's report today:

The decline in the average pay for men meant that the pay gap between men and women narrowed between 2008 and 2013, from 22.5% to 20%. While average pay for men dropped by roughly £1 per hour (to £12.91), women’s pay fell by 40 pence (to £10.33). The average hourly pay of women in Great Britain in 2013, therefore, remained significantly lower than that of men.

No, this is wrong. And what is more they've all been told that it's wrong, that they're not to use this number. That, in fact, when they are using this number they are, just around and about, lying. Because what they are doing there is comparing the average wages of all men and all women, all part timers and all full timers. And because part timers are paid less (for very good reason) and also 75% of part timers are women that is a horrendously misleading number to use. To the point that Sir Michael Scholar actually berated people for using it some years ago.

The Foreword to Shaping a Fairer Future includes a short discussion of the differences between the earnings of women compared with men. It notes that “women are still paid, on average, 22.6 per cent less per hour than men”. This measure is described in a footnote as the “overall median gender pay gap”. On 11 June I wrote to the Minister for Women and Equality, the Rt. Hon. Harriet Harman QC MP to express concern over the way in which the 22.6 per cent figure had been used in a Government Equalities Office Press Release. In the view of the Statistics Authority this particular estimate, when used on its own without qualification, risks giving a misleading quantification of the gender pay gap. The analysis underpinning this view has been published on the Authority website as a Monitoring and Assessment (M&A) note on the gender pay gap.1 The Foreword to Shaping a Fairer Future helpfully presents estimates for both an overall gender pay gap (22.6 per cent) and a full-time gender pay gap (12.8 per cent). This goes some way towards ensuring that readers understand the difference between these two estimates. However, it would have been clearer had these two estimates been presented alongside each other and accompanied by some explanation of the differences between the two measures. As it stands, the 22.6 per cent figure appears in the Foreword more as a headline estimate of the gender pay gap, while the 12.8 per cent estimate is presented in a different context, to show how the gap widened between 2007 and 2008.

It would be an easy mistake for a casual reader to conclude from the Foreword that if the overall gender pay gap stands at 22.6 per cent and the full-time gender pay gap stands at 12.8 per cent, then the part-time gender pay gap must be considerably greater than 22.6 per cent. Indeed, the Foreword appears to confirm just such a conclusion when it states that 'pay gaps are even greater for part-time workers (39.9 per cent)’. The casual reader would be surprised to learn then that median hourly earnings of women and of men (excluding overtime) are very close, with women’s median pay actually being slightly higher than men’s (by 3.4 per cent).

Sir Michael also wrote to Harriet Harperson on the same point:

I am writing to you about the Government Equalities Office (GEO) Press Release on the Equality Bill, issued on 27 April, which states that women are paid on average 23 per cent less per hour than men. GEO’s headline estimate of the difference between the earnings of women compared with men (generally referred to as the gender pay gap) is some 10 percentage points higher than the 12.8 per cent figure quoted by the Office for National Statistics (ONS). Yet both estimates are derived from the same source, the 2008 Annual Survey of Hours and Earnings (ASHE). Such a difference in headline estimates is likely to confuse the general public. The Statistics Authority is concerned that this may undermine public trust in official statistics.

So, EHRC, this is a horribly misleading manner of presenting the gender pay gap. You've been told, repeatedly, that it's a horribly misleading way to present it. And you've also been told not to do it. So, why are you lying to us all?

Yes, we will accept an apology, no, no need to ritually execute your report writers in Salisbury Square, just correct your reports and, as Mother always told us all to do, when found to be in error, say sorry and promise not to do it again.

A setback for surrogacy

It is the opinion of some that renting a womb from a poor, often illiterate woman in India, for rates cheaper than in the West, is ‘exploitation’. A few days ago, the Indian government moved to limit this supposedly objectionable practice by banning foreign couples from hiring surrogates there. However, the practice of paying a woman to be a surrogate mother is, in fact, the complete opposite of exploitation. The average wage rate for a woman living in rural India (where the vast majority of these surrogates are from) ranges from 85 to 150 rupees a day, depending on what type of work they do and what region they live in. That’s a range of 84p to £1.50 a day, or a maximum of around £550 a year, if they work a full 365 days.

Now compare that to the £5200 ($8000) the average surrogate receives for just 9 months, and you can immediately see the benefit. For a woman in rural India, the real travesty is the poor wage rates they currently receive for hours of backbreaking work on a farm, not the American and UK individuals willing to pay them ten times what they’d usually get a year.

The next reason this policy fails is because most of the market for surrogates in India is from foreign families - thousands are estimated to use the service a year. Getting rid of demand from abroad will not only reduce in the number of woman hired as surrogates, but also lower their average income, as supply will outweigh demand. This of course ignores the obvious emotional cost to thousands of foreign women, whom will be losing the opportunity to have their own child.

Compared to most developing countries, India has a fairly comprehensive health system, keeping risks to the surrogate’s health low. Many women hiring the surrogates also send out care packages and pay extra to ensure their surrogates are well taken care of in facilities or hotels for the duration of their pregnancy. Although it is true there need to be measures to safeguard the surrogates, simply cutting out a huge part of the market is not the solution. Surrogates frequently use the money they've earned as a springboard into further education or training, or to pay for their own children's school fees, improving their future prospects and alleviating the cycle of poverty- an opportunity the Indian government has just restricted.

Therefore, although well intended, it is clear to see how this policy will actually do more harm than good to those it is trying to protect.

Do later sunsets really lead to a safer society?

An interesting blog by Jennifer L. Doleac and Nicholas J. Sanders posted on Brookings. Perhaps keeping the clocks the same all year round is a relatively cost-free, easy way to reduce crime?

On a seemingly-arbitrary Sunday each spring and fall, we all dutifully change our clocks by an hour, often griping about the hassle. Sometimes we do this only after missing an appointment, making the transition even worse. Even in a modern world where electronic devices update time for us, the shift of an hour messes with sleep patterns and daily routines – anyone with kids can tell you babies don't respect Daylight Saving Time (DST). Why even bother with the shift anymore? What's the point of moving an hour of sunlight into the evening?

In a new paper forthcoming in The Review of Economics and Statistics, we find that shifting daylight from the morning to the early evening has pretty hefty returns for public safety. When DST begins in the spring, robbery rates for the entire day fall an average of 7 percent, with a much larger 27 percent drop during the evening hour that gained some extra sunlight.

Read the full article here.

Mummy, what's the World Health Organisation for?

The World Health Organisation now has its little list of the things that cause cancer. The Mail helpfully lists them all. Some are obvious: it should come as no great surprise that ionising radiation from the breakdown of radioactive elements is cancer causing. Others are a great deal more controversial: the inclusion of silica for example. It's entirely true that very fine particles can, if they invade the lungs sufficiently, cause cancer. However, simply listing "sand" as carcinogenic makes Brighton off limits: even while the sort of Greens who live in Brighton insist that we must not frack for gas because it uses that carcinogenic sand.

Similarly, the listing of beryllium is not quite right: it is the dust of it, and more specifically of the oxide and or metal, that can cause berylliosis (a horrible disease, akin to mesothelioma from asbestos exposure).

It's also true that certain smokeless tobacco products do cause cancer: yet things like snus seem to reduce overall cancer rates by reducing the amount smoked. And it would be wonderful to point out that yes, it's true that gallium arsenide is cancer causing, but that's the arsenic in it, not the little chip made of it that sits in the middle of every mobile phone.

However, what confuses us is that the list does not include the one greatest cancer risk that we all face: long life. That we are all mortal, a couple of biblical exceptions aside according to the stories, is a fact of our existence. So thus not dying of smallpox, plague, starvation, rheumatic fever, toothache, measles or idiot wars, as all too many of our forbears did, is thus a cancer risk. Because if we don't die of them we'll survive long enough to get some form of cancer or another.

At which point we rather find ourselves wondering, as with the possibly allegorical little girl who asked this of Gladstone, "Mummy, what is the World Health Organisation for?"

For Mr. Chakrabortty: why we saved banking and aren't saving steel

Over in The Guardian Mr. Chakrabortty asks us this fascinating rhetorical question:

Why don’t we save our steelworkers, when we’ve spent billions on bankers?

There's two answers to this, neither rhetorical.

The first is that those billions we spent upon bankers, that trillion in fact, was temporary:

Imagine what would happen if manufacturing were centred around the capital, and its executives had Downing Street on speed dial. Actually, you needn’t imagine – merely remember the meltdown of 2008. Then Gordon Brown was so desperate to save the City that the IMF estimates he propped it up with £1.2 trillion of public money. That’s the equivalent of nearly £20,000 from every man, woman and child in the country doled out to bankers in direct cash, loans and taxpayer guarantees.

The vast majority of this was emergency liquidity provision, something that a central bank is supposed to do in a fractional reserve banking system. It's all been paid back, with interest. It's not made a loss, far from it, it's made a profit for the taxpayer. Yes, there's interesting arguments we can have about those residual stakes in Lloyds and RBS but it's absolutely not true that it all "cost" each taxpayer that sort of sum. That we use the central bank in a fractional reserve system to do what the central bank should do in a fractional reserve system is not in any manner an abuse of said system.

The second answer is that we actually want to continue having a financial system after that wobble of the Crash. It's not in fact true that we want to have a basic steel industry. Technology does change, there's little to no reason for rich countries to still be running blast furnaces. Which is why so many of them have closed over recent decades in those rich countries. It's not just here: even the French let the Florange furnaces close. Making basic steel is, these days, a pretty basic industry. Those parts of the British steel industry that are making the high value added products (like the higher end of the stainless steel industry) are still, as they have been all along, exporting to places like China. And this is what makes a country rich in the first place: that it concentrates on the high value added parts of production. Simply because that's how high wages can be paid, concentrating on doing things with high value added.

In a nutshell, aid to banking was a temporary measure to cover a known weakness of the system, a system we most definitely wanted to retain (try thinking about an economy with no banking system: it's to think of an economy with no economy). Aid to basic steel production, from virgin materials in those blast furnaces, would need to be permanent as it is in fact a residual technology, one that we almost certainly shouldn't be doing any more given the low value added.

If the problem were, as it was in banking, to do with short term liquidity and confidence in the steel industry then sure, why not think about covering, at a profit, that gap using the power of government and the taxpayers' funds? But if that ain't the problem then what's the justification?

We're going to have to tax middle aged women having unprotected sex

It is of course sad that we've got to make this policy suggestion, perhaps imperative is better than suggestion, but it is for the NHS you know, so it is indeed valid. We're going to have to impose a tax on middle aged women having unprotected sex. It just costs said NHS too much money:

In every year since 2006 more than 110,000 babies have been born to women in their late thirties. This is a level of births not seen since just after the Second World War, and four times the level of the late 1970s, the RCM said.

For women in their forties, births have been above 29,000 for four years in a row. These are again numbers not seen since the years after the second world war, and are almost five times the level of the late 1970s.

Cathy Warwick, RCM chief executive, said: “All women deserve the very best care, regardless of the age at which they give birth. Women have every right to give birth later in life and we support that. But typically, older women will require more care during pregnancy, and that means more midwives are needed.

Older mothers cost the NHS more money: therefore those partaking in the risky behaviour which might lead to it costing the NHS more money must be taxed.

We know that this is the correct solution: exploding livers cost the NHS money therefore alcohol must be taxed more highly, perhaps even with a minimum price as well. Lung cancer costs the NHS money therefore cigarettes must be taxed more highly. And people shouldn't be allowed to do it indoors, or in a car, or anywhere near children. Obesity costs the NHS money therefore fizzy pop must be taxed more highly. And no doubt at all, given that processed meat causes cancer now, there will be someone along to shout that bacon butties must double in price and not be eaten where children could believe that such behaviour is normalised.

Therefore, given the basic logic by which our society works, middle aged women who have unprotected sex must be taxed. For the result of this costs the NHS money. And perhaps they should be banned from doing so indoors, in front of children, in cars, and possibly a minimum price must be imposed. And definitely not in pubs where they might enjoy it with a drink.

Alternatively we could suggest that the NHS, which we pay for, is there to treat the results of how free people live their lives. But that's such a radical idea that it will never catch on, will it?

Does welfare reduce poverty?

Does welfare reduce poverty? That might seem like a stupid question. Welfare is basically giving money to the badly-off. Of course, there are lots of glitches in the system which make it less efficient and effective than it could be and limit its potential (see the ASI's latest paper for more on that). But it still targets those in need reasonably well, even if it could do better. However this may not be true for all groups. Harvard's George Borjas, among the world's experts on the economics of immigration, finds in a new working paper that in one specific case welfare did not increase recipient incomes and reduce poverty.

The Personal Responsibility and Work Opportunity Reconciliation Act of 1996, the major Clinton-era bipartisan welfare reform, slashed federal spending on welfare benefits, cutting especially immigrant eligibility for major payments. Many, but not all, states decided to cushion their immigrant populations from the blow, making this a natural experiment. We can look at the difference between immigrant populations in states that did and didn't cushion them to discover whether cutting hit those who used to get it, or whether it induced extra waged labour to make up the gap?

In practice Borjas finds that the entirety of the loss in reduced welfare benefits is made up by extra earnings from working in the labour market. In fact, more than the entirety is made up, and cutting welfare actually reduced poverty for the most-affected immigrant groups.

In Borjas's words:

The evidence presented in this paper strongly suggests that, at least in terms of officially measured poverty rates in immigrant families, the welfare state is not a panacea. For these families, welfare contributes to poverty.

Now, I am sceptical as to whether this is widely applicable. There may well be differences between immigrant groups and natives of similar socioeconomic status—for example, first generation immigrants are widely perceived as having a stronger work ethic. They may also have lower savings to run down, credit to run up, or family ties to rely upon. It may be more credible that the authorities will let them endure real economic hardship—whereas the hardship of others may be more visible and salient for voters and welfare authorities. So this finding probably does not apply to native welfare recipients.

These points are why the ASI, and myself, favour a generous but simple welfare system: the negative income tax. But the finding is certainly interesting. In at least some cases, welfare does not reduce poverty, and may even increase it.

Erm, why?

Paul Mason says something that confuses us greatly. It's as if he's never actually heard of the concept of spontaneous order:

But in a smart city, you need data to flow freely across sectors that, in the commercial world, would normally be separate. The energy system needs to know what the transport system is doing. And the whole thing needs to be run like a “God game”: the city government, not the individual, must exercise control.

This is exactly the wrong lesson to take from these new technologies. But it's that old idea again, the idea that "someone" must be in control. Someone must run the country, someone must run the economy, someone must pan and detail what people and systems must do. And we've good evidence, we normally call it the 20th century, that this isn't how to make the world function effectively.

Certainly, there need to be rules, but those that work best are simply codifications, clarifications if you will, of what people are doing already. So look to society, see what people are doing, then write down what people are doing. But the idea that there needs to be a plan, a controller, over and above this is simply wrong.

Which is rather the point of these new technologies. Yes, at our previous stage of technology it was necessary for people to plan cities to some extent. But the entire point of the new level is that we can just hand this back to voluntary interaction. There doesn't need to be a Fat Controller in a system where we can all effectively interact.

That's entirely the point. We're now able to make cities work, if we're to believe this smart city hype in the first place, as markets, not planned systems. And markets don't need that God running the game, they manage it quite happily on their own.

Free Market Welfare: The case for a Negative Income Tax

The government should replace tax credits, Jobseeker’s Allowance, the Universal Credit, and most other major welfare payments with a single Negative Income Tax, according to a new report from the Adam Smith Institute, Free Market Welfare: The case for a Negative Income Tax. This Negative Income Tax (NIT) would act as a minimum income guarantee for all British citizens and be tapered away as people’s earnings rise through work. Britain’s existing welfare programmes are costly to administer, complicated to navigate, and designed for a postwar-style labour market that no longer exists, the paper argues.

Under a Negative Income Tax, if a citizen earns nothing then the automatic NIT payment will be their entire income. As the individual earns more through work, the payment is gradually withdrawn until the citizen begins paying tax. The payment scheme is structured so that the claimant is always better off working more hours or taking higher wages than in their current position. These payments would be automatic for workers within the PAYE system.

The report says that the biggest welfare challenge future governments are likely to face is chronic in-work poverty, as globalisation and technological change lead to lower productivity and pay growth for some bottom and middle earners. This means that Britain’s current welfare system is outmoded and must be restructured to support low-wage workers throughout sustained periods of low-paid work, not just when they are out of employment altogether.

Systems like tax credits and the Universal Credit aim towards this goal, but are still too complex. Instead of a complicated web of different payments, the government should make just one, the report’s author Michael Story argues. Recipients would decide themselves how to spend their benefit, and as they earn more in wages, the benefit would be withdrawn at a rate that guarantees work always pays.

A simpler welfare mechanism like the Negative Income Tax could be integrated into the tax system, allowing the government to shut down the Department for Work and Pensions, take many of its 34,000 staff off the payrolls and save up to £6bn in administration costs.

To read the full press release, click here.