Ten questions for the “leave” campaign

Let’s ignore the fake alternatives of HMG’s recent papers - the scare stories about the UK’s position with third countries . Let’s also ignore the threadbare character of the government’s “renegotiation” with the “reformed” EU. No-one with a ha’porth of sense pays any attention to either. We can’t however, ignore the fact that the “leavers” need to come up with a crisp account of what they expect the electorate to vote for. Let’s orient ourselves by looking at the table of alternatives below.

Chart 1: Alternative trading arrangements for the UK

table 1

Sources: ASI, Global Counsel, David Campbell Bannerman MEP, HMG

This table is largely based on material from Global Counsel, a “stay” outfit, but it succeeds in illustrating the political character of the alternatives. The top row shows the present position, ie, that of the “stayers”; the bottom row attempts to capture the objectives of those advocating leave. The colours for the “stayers” at the top more-or-less reverse those for the “leavers” at the bottom. No surprise: the “stayers” are willing to tolerate the current sacrifice of sovereignty to maximise trade access; the “leavers” want to maximise “sovereignty” and will tolerate a bit less trade access. The five rows in the middle set out alternatives, with a rainbow of colours showing their various combinations of trade and sovereignty.

In the event, the “leave” campaign is currently engaging with four alternatives, of which only two show up in the table. All have strident proponents, strengths and weaknesses and unanswered questions.

1.The “Norway option” is advocated by Christopher Booker, Richard North and Robert Oulds. They say that this is the only realistic option, as the tangled web of UK/EU/third-party relations will take years to unravel and that it violates international law and common sense to accept the view (heard from, eg, Bernard Jenkins) that UK could legislate unilaterally so that “with one bound, Jack was free”. They argue that this option takes advantage of the precedent of Norway itself and the existing institution of the European Economic Area, which gives its members greater influence over EU policy than the UK has at present. It gives rise to the following questions:

• As this option involves accepting almost all of the EU’s existing acquis, ie, its existing complement of policies (in particular, including free movement of labour and a financial contribution to EU funds), how is the leave campaign to communicate it to the electorate as more attractive than the prevailing position?
• Do these arrangements really hold out the prospect of more influence than that enjoyed by the UK at present?
• Is it realistic to accept the contention that this option alone conforms to the Article 50 timetable of 24 months?

2. The “Australia option” has been mentioned by Richard North largely as a fall-back from the “Norway option”, but possibly as a more attractive alternative. Australia and the EU have negotiated a “Mutual Recognition Arrangement” (MRA), which eases the supply of goods and services between the two without obliging either to engage in intrusive harmonisation. At first sight, this scheme looks attractive but it has been little examined and gives rise to the following questions:

• Isn’t it the case that the Ozzie MRA is limited to a small number of technical rules in restricted areas?
• Does the bargain struck between the EU and Australia (or something realistically within the compass of negotiators) address the UK's reasonable objectives?
• Is such an arrangement realistically on offer or can negotiators realistically put it on the table within an acceptable timescale?

3. “WTO-plus” is pushed by David Campbell Bannerman in several books including a new one out later this month. The scheme’s attractions are that a minimum (ie, no more than compliance with the “Most Favoured Nation “ [MFN] rules of the World Trade Organisation [WTO]), it requires no assent from the EU. The idea is that after notice has been served under Article 50, negotiations between the EU and the UK will improve trading conditions above the WTO minimum. It gives rise to the following questions:

• Would such arrangements actually give sufficient access for UK exports (including re-exports) to the EU, in particular those involved in “just-in-time” supply-chains operating on a continental scale?
• How would such arrangements address services, the largest and fastest growing part of the UK’s economy and the sector in which we have greatest comparative advantage?

4. “Vote ‘out’ to renegotiate ‘in’ ” is no longer favoured by Boris Johnson but remains the objective of Michael Howard. The idea is that this would minimise disruption by giving the UK the best of both worlds. Two questions arise:

• How is such a scheme to attract those for whom “leave” means “leave”?
• How would such a scheme avoid accusations of preparing to break trust with the electorate, as political leaders are said to have done in 1975 and since?

We can’t answer every question but here are some preliminary conclusions.

a) Every alternative is imperfect. The question before the “leave” campaign is how they compare to each other. The question before the electorate is how the “leave” campaign’s selected option compares what the “stay” campaign is defending. We address the latter in a companion note, “Five questions for ‘stayers’.“

b) The alternatives on offer are better seen as journeys rather than destinations - in the grim jargon of government, a “direction of travel”.

c) HMG should be working up its own "plan B". It may make for fine campaigning polemic not to do so, but it also feels irresponsible and disrespectful to the electorate.

d) Unilateral legislation may not be able to resolve relations with the EU or others for all time but it can certainly freeze them with third parties for renegotiation at leisure. This is also perfectly consistent with international law. In general we warm to a programme of “freeze, then reform”.

e) Finally, negotiations may proceed better for the UK from an assumption of nothing (ie, WTO/MFN arrangements) rather than an assumption of the current state. After all, psychologists tell us that our species is constitutionally risk-averse: we prefer avoiding loss to making gains. If Brexit comes, better to apply that pressure to our negotiating counterparts!

The “leavers” need to nail their colours to the mast before campaigning officially kicks in, with the Electoral Commission’s decision on “designation” in mid-April. To get there, they need to work up good answers to these ten questions.

Against the Nordic model and in praise of Corbyn

Unusually, I have found myself in complete agreement with Jeremy Corbyn. The Labour leader’s support for decriminalising prostitution is laudable, and it is refreshing to hear endorsement of a civilised alternative to knee-jerk authoritarianism. It is disappointing (if not surprising) that his stance has provoked indignant outrage from Labour MPs and retrograde feminists. Decriminalisation, which is supported by Amnesty International as well as most sex workers, is the only way to protect the vulnerable, respect the autonomy of those who do it by choice, combat people trafficking, and make commercial sex safer, less stigmatized, and less exploitative.

There is evidence that decriminalisation increases the safety of sex workers. It is absurd to imagine that criminalising sex workers (or, indeed, prohibiting brothels) is helpful. Threatening someone with arrest does nothing to help them if they are forced into, rely upon, or actually enjoy their work.

If decriminalised, sex workers are more likely to be taken seriously when reporting abusive pimps and violent customers who are breaking the law. Working in a brothel is safer than working on the street, and it is even safer to work in an institution that is not breaking the law by existing. It is easier to prevent trafficking when sex work is not underground for the same reason that it is easier to monitor the employment practises of McDonald’s than those of a drug cartel.

Interestingly, the main opposition to this common-sense policy now comes from the authoritarian left rather than social conservatives. This is exemplified by the fashionable ‘Nordic Model’, which decriminalises selling sex and criminalises buying it in an attempt to undermine the sex market without harming workers. Although touted as progressive and nuanced, it is actually myopic, unethical, and dangerous.

The Nordic Model is largely motivated by the belief that buying sex is always exploitation because all sex work involves trafficking, coercion, or, at least, economic pressures. This is a gross simplification. Whilst trafficking is a huge problem and pressures exist for many sex workers, others genuinely enjoy their work and many simply prefer it to available alternatives.

Even if it were true that all sex work resulted from desperation, for many it would remain the only or least bad option available. Even if buying sex were always and everywhere inherently exploitative, it would still marginally benefit people who have to rely on it to survive.

It is irrelevant that the Nordic Model does not directly target sex workers: if the model successfully disincentives buying then it is harming the seller by depriving them of income. Either they lose clients or are forced to lower their prices. Alternatively, if workers have plenty of alternatives to selling sex, prohibition is merely a pointless assault on autonomy. And, if criminalisation is not a sufficient disincentive to customers (it tends not to be), then the policy is both pointless and actively causing harm by keeping trade underground.

In which we doff our cap to Chris Snowdon of the IEA

Applause here for Chris Snowdon, one of those fighting the good fight over at the IEA.

The chairman of the Charity Commission has been accused of actively helping a leading critic of charities who inspired a controversial new law curbing their activities.

Documents released under the Freedom of Information Act reveal that William Shawcross urged a trustee on his commission to meet Christopher Snowdon, head of lifestyle economics at the Institute of Economic Affairs (IEA), a free-market thinktank that receives funding from big tobacco and has taken money from at least two oil company giants in the past. Snowdon is the author of a 2012 discussion paper, Sock Puppets: How the Government Lobbies Itself and Why, which argued that government grants should not be used by charities to lobby politicians, as this meant that “government funds the lobbying of itself”.

IEA research was used by the government to justify a new “anti-advocacy clause” that will be inserted into all government grants for charities, prohibiting the money from being spent on lobbying.

The whole piece really needs to be read as it's a just staggering piece of nonsense. For example, that one of the people involved might not be fully signed up to the idea that climate change is an immediate and catastrophic problem is dragged in to prove to all right thinking people that any and every of his other views must be wrong.

On a more basic level of course this is exactly what think tanks should be doing and what we all do do to the best of our ability. Identify what we think is a problem in the current state of things and propose a solution. As an example, a decade ago here we started pointing out that we don't in fact have low wage poverty in the UK. We have tax poverty: the taxes charged to those on low incomes are too high and this is what creates that poverty that people so bitterly complain about. A decade later it is government policy (and it appeared in three of the four manifestos of parties which won over 5% of the vote last general election) to raise the personal allowance to levels where those we might regard as being in poverty no longer pay income tax. not the entire solution but a good start.

So too here with Chris Snowdon and the sock puppets. As he's identified there really are groups out there who live on taxpayer money and whose only activity is to lobby government for changes in the law. This shouldn't happen and the law is changing to make sure that it doesn't.

Good.

And there's a delicious irony in what those sock puppets are now complaining about. They are complaining that Chris and the IEA informed government and thus changed policy. The very thing that they insist they should be allowed to do but obviously not Chris and the IEA be allowed to do. That's the sort of argument that really should be met with a staccato burst of ripe Anglo Saxonisms.

There's a reason Robert Reich is a professor of public policy

And not, say, a professor of economics. Here is Robert Reich trying to point out that the economic plans of Bernie Sanders are just copacetic. Everything adds up, kittens will gambol down sunbeams again and my, won't the Republicans be put to the sword?

Not day goes by, it seems, without the mainstream media bashing Bernie Sanders’s economic plan – quoting certain economists as saying his numbers don’t add up. (The New York Times did it again just yesterday.) They’re wrong. You need to know the truth, and spread it.

1. “Well, do the numbers add up?”

Yes, if you assume a 3.8 percent rate of unemployment and a 5.3 percent rate of growth.

That's not even true in and of itself. It's necessary for there to be a 3.8% unemployment rate, a significant rise (several percentage points) in the portion of the working age population actually working and then near a decade's worth of that 5.3% growth rate. That rise in the portion working is most important: because given the demographics we generally think that is the really impossible part: the baby boomers are retiring, coming up to retirement, and people often do not wait for 65 to do so.

However, the real joy of this is that Reich is simply assuming what everyone else is insisting is impossible. No one is doubting that if you could have those three things then the Sanders economic plan would perform miracles. The doubt, in fact the insistence that it will not and cannot happen, is that those three things will not happen.

We could just about imagine a 3.8% unemployment rate at least for short periods of time. We cannot believe that the demographics will allow a larger working age participation and we absolutely insist that 5.3% real growth (the assumption is that inflation will stay down) cannot happen. There simply isn't that much slack in the American economy, meaning that the nominal growth will show up as inflation long before we're able to have 5% and more real GDP growth for years on end.

That is, Reich is insisting it will work if we just accept all the major points which we insist cannot happen.

This might even be great politics but it's not obviously economics of any useful sort. Thus, presumably, the job description.

It's not entirely obvious that comprehensive education is the right solution

That headline is to put it somewhat mildly of course. One problem with truly comprehensive education, where all do attend the same school, is that there's sometimes a minority who really don't want to be there. And who will make this blindingly obvious through their behaviour. Now, true, they do still need to be educated. However, the point and purpose of comprehensive education, the actual underlying moral argument, is that it is better if we are indeed all educated together. And this isn't true so this study says:

A large and growing literature has documented the importance of peer effects in education. However, there is relatively little evidence on the long-run educational and labor market consequences of childhood peers. We examine this question by linking administrative data on elementary school students to subsequent test scores, college attendance and completion, and earnings. To distinguish the effect of peers from confounding factors, we exploit the population variation in the proportion of children from families linked to domestic violence, who were shown by Carrell and Hoekstra (2010, 2012) to disrupt contemporaneous behavior and learning. Results show that exposure to a disruptive peer in classes of 25 during elementary school reduces earnings at age 26 by 3 to 4 percent. We estimate that differential exposure to children linked to domestic violence explains 5 to 6 percent of the rich-poor earnings gap in our data, and that removing one disruptive peer from a classroom for one year would raise the present discounted value of classmates' future earnings by $100,000.

That disbenefit of having the disruptive pupils should obviously be considered against whatever are the social benefits of all being in it together. But given that immense difficulty anyone has in making sure that one of these disruptive pupils does not in fact disrupt we're really pretty certain that this is not considered. It should be.

The In and Out campaigns are both wrong about wages and immigration

Earlier on this week, Lord Rose, head of the campaign to keep Britain in the EU, made a somewhat large mistake in claiming that EU migrants are depressing wages in the UK. The Out campaign has jumped on his blunder, using it as ammunition to argue that leaving the EU will lead to wages rising for Brits.

However, this claim may not be as straightforward as it seems. The issue of immigration and wages has always been a contentious one, and there are a number of perspectives to consider.

Firstly, it is too much of a broad brush to simply say “wages will rise” if we leave the EU. When looking at this issue, we must assess exactly whose wages will be affected. The people whose wages will be most affected by immigration are those who are of a similar skill level to the arrivals. Seeing as the majority of EU immigrants are unskilled, it is therefore the lower-skilled workers whose wages are most affected, as they can be substituted for immigrant workers, who are often prepared to accept lower pay. In other words, in the UK it is only the bottom 20% of earners who are likely to be negatively affected by immigration.

While it may be fair to blame the EU for this increase in unskilled work supply (of the unskilled workers who arrived in the EU in 2013, 80% were from the EU), there is no evidence to show that these arrivals in fact contribute to a decrease in income levels across the population as a whole. 

A 2008 study shows that while 20% of the workforce may be negatively affected, the decrease in wage levels is unlikely to be more than -1.5%. Furthermore, a 2012 study showed no statistically significant impact on claimant count rates as a result of immigration, suggesting that unemployment of UK nationals was not affected either. The evidence actually shows that there is in fact a net positive impact on wages in the UK, as higher-skilled worker’s wages benefit from immigration. From a 2013 paper by Dustmann:

These estimates indicate that an increase in the foreign-born population of the size of 1% of the native population leads to an increase of between 0∙1% and 0∙3% in average wages. As the average yearly increase in the immigrant–native ratio over our sample period (1997–2005) was about 0∙35% and the average real wage growth just over 3%, immigration contributed about 1∙2–3∙5% to annual real wage growth

It’s therefore clear to see that the claims regarding wages from both campaigns can be debunked. Dustmann isn’t the only one to argue that immigration has a minimal effect on wages either, with other economists such David Blanchflower recently arguing the same thing.

Although it is true that wages on the bottom of the scale are negatively affected, restricting EU immigration does not seem like the best way to rectify this. The benefits of immigration and wealth created as a result would more than pay for the redistribution of wealth to those who lose out, for example through the system of tax credits. The EU may have many problems, but the case that immigration leads to decreased wages is not one.

CEOs really are worth more than they used to be

I’ve speculated before that one of the main reasons that CEO pay has risen quickly since the 1950s might be that CEOs have become more important since then. The question is very important because people who worry about executive pay use this rise as evidence that CEOs are overpaid now – if they were only paid ten times what the average worker was in 1965, how could they possibly be worth two hundred times that now?

A new paper tests this hypothesis. It looks at what happens to firms’ values after CEOs die unexpectedly. (To be precise, they look at “cumulative abnormal returns”, or the difference in firm value compared to what was expected, over a five-day period.) If CEOs are important and difficult to replace, firm values should move a lot when they die. If they aren’t important or are easy to replace, they should move a little. Note that we shouldn’t expect firms to always become less valuable – a bad CEO dying should make the firm more valuable, just as sacking a bad CEO does.

Interestingly, they find that the average change in firm value doesn’t change over the 1950-2009 period. That is, the good and bad CEOs cancel each other out. But the variance – how big the changes in value are – has changed a lot. Over the course of 60 years, “the shift in market value caused by an unexpected CEO death increased by approximately $65 million (in 2009 dollars)”.

What that implies is that CEOs have indeed become more important to firms over the past sixty years. The good ones are more valuable, the bad ones are more costly. I find that quite intuitive. Markets seem more competitive now than before, and technological change seems to be moving more quickly. That means that the strategic decisions that a CEO will help make matter more.

It also undermines the claim that CEOs are paid more than they’re worth. For sure, some of the cost to firms will be risk-based – the process of finding a new CEO is costly even if the old one was no good. But the fact that the cost is much greater for some firms than others – and that some firms do better when their CEO dies – seems to be good evidence that CEOs matter, and matter much more now than they once did.

The EU’s pro-cancer tax policy

If there’s anything the EU does well, it’s petty bureaucratic interference that worsens the problem it’s purporting to fix. It was, then, probably a mere matter of time before this approach would lead them to blunder towards e-cigarettes and propose policies that, effectively, promote cancer. The EU is making moves towards increasing tax on e-cigarettes by classifying them as a tobacco product and setting a minimum excise duty. This will, of course, lead to the price of e-cigarettes significantly increasing.

The logic appears to be that smoking is a demerit good that harms the consumer and imposes third party costs. Given the market fails to factor this into the price, the government steps in and places a ‘sin tax’ on the good, in order to discourage its harmful consumption.

Regardless of your views on the effectiveness or desirability of these policies with regards to smoking, there is a small problem with treating e-cigarettes the same way. They do not contain tobacco. Vaping, whatever its risks and flaws, is not smoking. In fact, most vapers use e-cigarettes as a substitute in order to give up smoking, with almost one million doing so successfully.

Whilst largely motivated by the (comparatively) lower risks of inhaling nicotine without tobacco, the considerably lower price of e-cigarettes is another major attraction (the smoother feel, the better taste, and the less unpleasant smell don’t hurt either). Anyone familiar with basic economics understands that raising the price of a product will make more people buy a substitute instead. In the case of smoking, which is more than a little habit forming, this is even more likely to lead people to stick with their established habit rather than switching to the alternative.

It is true that the risks of vaping are not yet fully known. However, the research that has been done indicates that it is 95% healthier than smoking. And, in any case, punitive taxation and crushing regulation can only be justified when the cost of intervention is outweighed by the activity’s perceived cost to third parties. It is arguable that this standard has been met for tobacco. It is absurd to think it applies to vaping.

The motivation for this move is probably the tax revenue that EU Member States fear they will lose if people switch from tobacco to vaping. This seems a poor excuse for imposing a policy that effectively protects carcinogenic products from competition. This also appears to be an incredibly misguided move in the build-up to the Brexit referendum.

Property rights work—even in fish

In theory, it's hard to set up property rights systems over many goods. A classic example is fish in the sea. Usually property rights involve stuff that stays put or whose movement you can control. But dividing up the ocean would be unimaginably difficult and hardly desirable even if we could do it. And fish will swim around.

So it would seem that it's pretty hard to have property rights over fish—who's to say that this fish is mine or yours? When a fish swims into my plot of sea does it become mine, or is it still yours because it came from your plot of sea?

Of course, laws have got around these simplistic problems, and given fishermen "individual transferrable quotas"—each of them are only permitted to bring back a certain number of fish (details explained well here). It encourages efficiency, because if someone else can haul in your take cheaper than you, you can sell your right to them. But unlike a total quota, there's no race to bring in as many as possible in as short as possible a time.

This system has done pretty well at preventing stock collapses and has been emulated in Alaska, New Zealand and elsewhere. But it may have another benefit, according to a new paper by Lisa Pfeiffer and Trevor Gratz: reducing fisherman risk-taking:

Commercial fishing is a dangerous occupation despite decades of regulatory initiatives aimed at making it safer. We posit that the individual allocation of fishing quota can improve safety by solving many of the problems associated with the competitive race to fish, which manifest themselves in risky behavior such as fishing in poor weather. We present a previously unidentified approach to evaluation: estimating the change in the propensity to start a fishing trip in poor weather conditions as a result of the management change. We chronicle a revolution in risk-taking behavior by fishermen (a 79% decrease in the annual average rate of fishing on high wind days) that is due to the change in economic incentives provided by rights-based management.

So that's another win for property rights then!

Trying to judge today's trade by the old rules

We have to admit that we quite like the mental image this conjures up:

The idea of buccaneer Britain trading freely outside the EU is a fantasy

Avast ye scurvy swabs and buy moi foine products!

Yes, yes, and given that one of us just dubbed a pirate's voice for a computer game, thrice yes. However, there is a slight fault in the argument being put forward here about trade:

The first is distance. Imagine if all of Britain's trade agreements were suddenly erased from history, and we had to restart our negotiations from scratch. Our first priority would be to reduce the cost of trade with big, nearby economies. Trade diminishes quite rapidly with distance: half of Britain’s exports go to the EU, which makes up a fifth of the world economy. Meanwhile, the non-European members of the OECD – although they comprise a third of the global economy – only buy a quarter of Britain’s exports, because on average, they are seven times further away.

This very definitely used to be true: the costs of trade were dominated by the simple transport costs of doing that trade. Given the general path dependency we see in the economy it's not all that surprising that the pattern persists. However, this is no longer true of new trade as a result of an invention made back in the 1950s: the shipping container.Certainly, it has taken a few decades to really work through the global economy but the costs of trade now are almost entirely divorced from simple physical distance. If you're on the container network then it costs something under $5,000 to ship 36 tonnes of anything anywhere. If you're not on that network then it is many multiples of that price.

More, a significant portion of that price is organisation, pick up and delivery, the container itself. The actual distance to be traveled doesn't make all that much difference. In this sense, in this transport sense, Chicago is as close to Coventry in geographic terms as Caligari is, as Cologne is. Not entirely you understand, but pretty much so.

The European Union idea, that we should be encouraging trade between close geographic neighbours even to the point of discouraging more long distance routes is a little like the work of the Reverend Malthus. Entirely true until the very date that someone sat down to write it all out. Traditional geography did matter and the system was designed to account for that. But that first container ship set sail 6 months before the Treaty of Rome was signed. The structures of trade based upon geographic proximity were thus being invalidated by the new technology at the very moment that policy tried to enact policies for that geographic proximity.

It has been true that, and current trading patterns still echo that it was true that, geographic proximity was important in trade. The actual distance traveled now is of near no importance at all. The world has changed since we set the rules, you see?