Migration and that North/South death rate difference

We've another of those terrifying facts detailing the gross inequality of the UK:

The effect of this economic dereliction is far deeper than simply a clunky rail service, however. This week, researchers from the University of Manchester and the University of York warned that the rate of premature death in people under 45 was falling in the south, but stagnating in the north. In 2015, the number of premature deaths of people aged 35 to 44 was 50% higher in the north than the south. Since 2008, the regional death gap has widened alarmingly, bucking a decades-long trend. Life expectancy is already lower in the north; now, if you don’t live in the south, your chances of dying young have increased.

As with all the other studies and claims about regional inequality the bit that no one is taking account of is migration. Bournemouth, for example, regularly appears near the top of longevity lists. That it is, to some extent, a retirement town, where people move in their 60s, is the explanation. People who are already in their 60s quite naturally have a longer expected lifespan than those who have already died at this age.

Similarly with the Appallachia story in the US. The region is depopulating. Those who leave are the young and educated, exactly those we expect to have the longer lifespans. We do not claim this is all of it, only that it is some of it - even if overall rates of drug death, suicide, alcoholism, don't change at all, if that portion of the population least prone to them leaves then the recorded rate in an area will rise.

British internal migration is not so extreme perhaps but it does happen rather more than in most other European countries. And as the ONS tells us the internal migrants are more likely to be North to South, young, healthy and male. Each of those things, men more than women, the young more than the old, healthy more than unhealthy.

At which point we do again insist that this is some part of what is causing that divergence of death rates. And also we insist that we're not going to pay much attention to figures presented which don't at least attempt to quantify the extent to which the recorded numbers are simply a product of such migration patterns.

Balearic Islands score an own goal

Another day, another counter-productive economic measure brought in by a left-wing government. 

This time it’s in the Balearic Islands, where a coalition of socialist parties has announced plans to cap the number of beds available for tourists and are introducing serious penalties to those using sites like AirBnB without a license (including fines of up to €40,000 for the individual listing and €400,000 for the company holding the advert).  

This isn’t a tourist tax; they’ve had a tourist tax since 2016. That tax is quite modest, with a maximum charge of €2 a room per night for the most expensive classification (applicable to hotel chains and individuals using gig economy listings). No, this is a full licensing system for both the formal and informal tourism sector. 

Given that UK visitor numbers rose throughout the economic downturn, and have continued to go up through recovery and during the recent period of stagnant purchasing power - even after the introduction of their tourist tax - you would be right in thinking that British tourist numbers to Spain and the Balearics are pretty inelastic. If you were a left-wing government looking to raise revenue to provide services you would think you would be pretty enthusiastic about a source of income that seems guaranteed.

Indeed the evidence for tourist taxes is pretty positive for those that want to control numbers. When Malaysia introduced one they found the tax was paid where the burden really should fall: by tourists (89% in the short run and 74% in the long run) with the revenues raised being quite predictable.

The reason that these taxes are quite a good idea isn’t purely because they can raise money but because they also correct externalities. Tourists can often come with externalities, like alcohol fuelled crime and anti-social behaviour, congestion and pollution. It makes sense to charge for costs incurred. 

But no. Instead the Balearic Islands’ government will hit the supply side. No new licenses will be issued from this year for at least twelve months, with almost 70% of the beds on the isle of Mallorca and over half in large chain hotels. The aim being to reduce the number of beds listed in the islands by 120,000. 

It will hit all manner of Mallorcans and Minorcans. It will hurt those now forced to apply for licences to list their spare rooms online or risk exorbitant fines. It will force restaurants and bars to adapt to reduced revenue from lower tourist numbers. And it will curtail innovation as large established hotel chains seize control of bed licences. Not to mention, of course, that a reduced number of beds will lead to a reduced revenue take from their tourist tax. 

The Balearic Islands have fared better than the Spanish mainland during the long recession the country has endured but the number of businesses there has only this year risen above its 2008 peak. Its citizens are looking for a way to profit from the huge interest in visiting its sunny shores and it’s reasonable to suggest that a tourist tax may help distribute the proceeds of visitors quite equitably. 

Instead of being reasonable and increasing taxes to fund programmes that the government wants to run, while letting the economy and incomes of its people grow, the socialists want to plan. Who would have guessed? 

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Thanks to Ananya Chowdhury, an intern at the Adam Smith Institute this week, for the help with the research!
 

The Bank of England’s incredible stress tests

The Bank of England’s 2016 stress tests are literally incredible. Of the seven big financial institutions covered in the exercise, only one (RBS) failed and that only by a narrow margin.

So what is wrong with the stress tests? Well, one problem is that the Bank used book values instead of market values. It should have used market values (for reasons explained here) and if one uses market values instead of book values, then four of the biggest five banks fail the test.

Another problem is the existence of a lot of hidden leverage associated with positions that do not appear on banks’ balance sheets, such as derivatives positions. The result is that no one can tell from banks’ published financial statements how leveraged the banks really are.

But perhaps the biggest problem is inadequate accounting standards. The weaknesses of IFRS accounting standards have been well-documented: they include the overvaluation of retained earnings, asset values and profits; and inadequate provisions for expected losses. To quote a recent letter in the Financial Times:

better forecasts and better weatherproofing both depend on a deeper problem being resolved: the poor quality of the numbers we are relying on to tell us what banks’ capital actually is. Is the stated “capital” in fact capable of absorbing lending or trading losses that inevitably come in a downturn?

At the heart of the crisis would appear to sit faulty accounts and unreliable audits. In the EU alone, between September 2008 and the end of 2010, more than 300 banks went cap in hand to governments for support—in the form of capital injections, asset relief, liquidity aid or debt guarantees. Few banks [had been] identified as having insufficient capital [prior to September 2008].

All of these banks had previously been signed off as capital adequate by their regulators. That is some regulatory failure.

Nor is it just reported asset values that are the problem. If retained earnings or profits are inflated – and the IFRS rules give bank management give plenty of scope and incentive to game these figures – then inappropriate distributions of dividends and bonuses will be made, which will have the effect of secretly depleting bank capital and inflating reported capital figures – and once again, you cannot tell from the reported figures what the true situation actually is. Indeed, one cannot even tell from the reported figures whether a bank is even solvent.

For more details, see my longer article here.

The thing about that Google diversity memo was that his science was right

Watching the firestorm over that Google diversity memo and flap has been illuminating for it would appear that large parts of the world are unable to comprehend fairly simple ideas. Or perhaps it's that large portions of people simply do not wish to comprehend. Owen Jones denouncing it all as sexism for example, but he's by far from the only culprit.

The important point here being that that memo did get the basic science right. As scientists in the field point out here, as is exhaustively discussed here and as even The Guardian was willing to print 12 years back.

Across the populations of men and women there are differences in the propensity for, interest in, certain jobs - even, certain interests in life in general. This tells us absolutely nothing useful about any individual as individual variation is far greater than this difference in general propensity. In very loose terms here the claim is that any individual man or woman, or any other variation, may or may not have the talents and interests that lead to being a good engineer. We would also expect to find more such among men than among women. And that's it really. This is also the result of the best science we've got at the moment so it would be worthwhile to understand it as we consider the world out there.

The implication of this is that people who hire for a certain specific talent may well find that their available hiring pool skews one way or the other on gender. That would, not unnaturally, lead to a skew in the workforce.

It's entirely true that it doesn't have to be this way. People can always, if they really want to, hire on strict 50/50 gender grounds although we would point out that in most places this is illegal, it's discrimination upon the grounds of gender.

However, we would go on and point out that all of this is also true of the gender pay gap itself. This exists not because men and women doing the same job are differently paid, but because there's a certain self-selection into different jobs. That gender pay gap is only going to disappear when all jobs, at all levels, are done by a gender balanced workforce. This is a point we've made many a time before.

And that's the really important point about this, why it's so important to understand the science rather than rail about it. At least some of this disparity of outcome - we would claim much of it but that's not necessary for the argument to work - is coming from self-selection, not the imposition of discrimination from the outside. Or, as we might put it, the outcome is a result of people deciding how they'd like to live their own lives.

And why are we complaining about that? 

The Psychoactive Substances Act Is A Failure

The Psychoactive Substances Act—which pre-emptively banned new psychoactive drugs (NPS) in the UK—came into force over a year ago. Critics of the legislation are already beginning to see their predictions about the law’s harmful effects being confirmed, but the government has recently doubled down on its defence of the Act. Last week, a Home Office spokesperson stated:

Since we introduced the Psychoactive Substances Act we have seen use of these substances fall significantly, hundreds of retailers shut, and the first offenders convicted.

The use of NPS has indeed fallen from 0.7% to 0.4% among 16- to 59-year-olds since the ban. Although a report released earlier this year by drug treatment charity Addaction suggested that some users are substituting NPS use with more traditional drugs post-ban, few contest the idea that criminalization reduces overall drug consumption to some extent. But the total number of NPS users is only part of the story.

Back when the Psychoactive Substances Act was being debated in Parliament, I highlighted two major reasons for opposing the law: negative impacts on vital scientific research into psychoactive substances and more dangerous NPS consumption.

Those working on developing psychiatric medicines have seen their fears realized. This morning, I spoke to Alex O'Bryan-Tear who works at the Beckley Foundation, which was founded and directed by Amanda Feilding to lead research into psychedelic substances. He explained that:

Research into psychedelics such as LSD and DMT has been tightly regulated since the seventies, requiring stringent safety and ethical approval. But research into all psychiatric medication has been dealt a significant blow by the Psychoactive Substances Act, which makes it possible to commit a serious drug production offence without having any idea, and impacts research into any new medicine.

Candidates for psychiatric medicine get produced and tested in animals to see how they interact with the brain's neuroreceptors. Scientists in the field say that if a new chemical is shown to activate one receptor in particular, the serotonin 2A receptor (formally, 5-HT2AR), that chemical gets shelved immediately. Why? Because it's this receptor that's known to be activated by classic psychedelics, meaning this new chemical could also have psychedelic properties and therefore be illegal to produce. The flaw in this reasoning is that countless chemicals activate the serotonin 2A receptor - including, of course, the brain's naturally-produced serotonin. We don't yet understand why psychedelics have their effect, while other 2A receptor agonists don't. Many classes of medication, such as antidepressants, act on the serotonin system too, so it's vital that we work to understand this system and develop drugs that manipulate it effectively. But the result of drug scheduling laws is that we senselessly discard hundreds of potential medications that could have valuable therapeutic properties.

It also seems as though the NPS varieties available following the ban are, as predicted, more dangerous for users: both in terms of the drugs themselves and the context in which they are taken. With many retailers (head shops) being closed down as a consequence of law, users are left without guidance on safer usage and estimated dosage. Josie Smith, head of the substance misuse programme at Public Health Wales, told The Guardian last week that:

What we’ve seen particularly with the synthetic cannabinoids [a category of NPS] is a reduction in the range that appear to be available on the market, and those that are available are stronger and more dangerous – potentially fatal…

This suspicion that NPS are getting more dangerous is backed up by hard evidence. After a string of incidents in Manchester involving spice—a popular NPS—tests revealed that recent post-ban batches of the drug were ten times stronger than usual. The harms associated with unpredictable, often higher doses of spice have also affected violence in prisons, where the drug is especially popular. This comes as no surprise. Higher potency drugs tend to increase their market share in line with stricter enforcement, since the fixed per-unit costs associated with illegal consumption apply equally to all drug strengths and make high-potency varieties relatively cheaper.

This whole mess could be avoided if politicians took a sensible approach to drug policy by legalising safer, better-understood drugs such as cannabis and MDMA. In the meantime, repeal this wrongheaded law before it can wreak more havoc on young people, the homeless, and prisoners.

Turns out Hayek was right about climate change too

As Hayek's Nobel Lecture pointed out to us, we simply cannot know enough about the economy, in enough detail, to be able to plan it in any detail. The only method we've got of even calculating it is the very markets which make it up.

It turns out that this applies to climate change as well:

Potent, climate warming gases are being emitted into the atmosphere but are not being recorded in official inventories, a BBC investigation has found.

Air monitors in Switzerland have detected large quantities of one gas coming from a location in Italy.

However, the Italian submission to the UN records just a tiny amount of the substance being emitted.

Levels of some emissions from India and China are so uncertain that experts say their records are plus or minus 100%.

The problem here being:

Among the key provisions of the Paris climate deal, signed by 195 countries in December 2015, is the requirement that every country, rich or poor, has to submit an inventory of its greenhouse-gas emissions every two years.

Under UN rules, most countries produce "bottom-up" records, based on how many car journeys are made or how much energy is used for heating homes and offices.

But as Hayek pointed out, we just cannot know the economy at that level of detail. Now, of course, we have our doubts about whether climate change really is the threat to civilisation that some claim. But why is it that those who do make the claim, who really do argue that this is an existential matter, why is it that these very same people have insisted upon using methods that we know can never work? Simply because we cannot, ever, know the economy in the level of detail their plans demand? 

A life-saving deregulation from the Trump admin

Last week, the US Department for Health and Human Services (HHS) scrapped one of the Obama administration's most harmful regulations. The Wall Street Journal Reports:

"...last week the Department of Health and Human Services withdrew a proposed Obama-era regulation that would have prohibited compensation for bone-marrow donation. About 11,000 ailing Americans are currently searching the national marrow registry, hoping to find a compatible donor. This year at least 3,000 people will die waiting for a transplant."

The reform will almost certainly save lives. Lives like Arya's:

"Arya Majumder would have celebrated his 19th birthday last month. Instead he died of cancer in 2010, his condition exacerbated by a scarcity of bone-marrow donors. Arya’s father later recounted how the loss of his only child “took away my very heart and soul, and triggered the collapse of my 23-year-old marriage.”"

Donating bone-marrow used to be a long, painful process, but recent medical advances mean that is no longer the case.

"The bitter irony is that it’s easier than ever to be a donor. Apheresis, a medical breakthrough from the mid-1980s, transformed most marrow extraction into an outpatient procedure. Donors receive a series of injections to boost blood-forming cells, which are then harvested through a six-hour process that’s much like giving plasma (n.b. compensation for blood plasma is legal in the US).

"Apheresis is not pleasant—the injections can cause flu-like symptoms, and it usually takes about a week to fully recover. But the process, now used in 70% of donations, sure beats the old needle-through-bone method."

These advances prompted the libertarian legal advocacy group Institute for Justice (IJ) to challenge the previous federal ban.

"Federal policy has long trailed medical progress. The 1984 National Organ Transplant Act prohibited payment for organ donors, and bone marrow was included, though it regenerates like blood, eggs or plasma. Represented by the Institute for Justice in 2012, the mother of three girls suffering from a condition known as Fanconi anemi, which often impairs bone marrow function, won a lawsuit against the federal government to allow compensation."

Just 2% of Americans are on the bone-marrow register. And even fewer (by about half) are available to donate at any given time. As Niskanen's Samuel Hammond points out "the average probability that two unrelated persons’ stem cells are compatible is less than one in 10,000. For two randomly selected African Americans, the probability of matching is less than one in 100,000."

And if an African American does find a match on the registry there's an 80% chance that their match is the only one on the register available to do it. A real problem when there's a large drop-out rate for matches (and especially high rates for ethnic minority donors).

From Bone Marrow Mismatch by Samuel Hammond (Niskanen Center)

Usually when demand outstrips supply higher prices incentivise greater production. But the Obama-era rule prevented that from happening by effectively imposing a price ceiling of $0 on bone-marrow.

Hemeos, a healthcare start-up wishing to compensate donors for their bone-marrow, estimate a $2000 payment would be sufficient to increase the follow-through rate of donors to 90%. Smaller payments could be used to incentivise people to sign up to the register in the first place.

Now that the HHS has junked the ban, companies like Hemeos are able to save lives and cut the waiting list.

We should do the same here in the UK, where the chance of BME patients finding a match on the register of volunteer donors prepared to give stem cells is 60%.

The Democrats antitrust proposals aren't a better deal

In the US, the Democrats are gradually starting to make some noise regarding the direction in which they would take the US were they to regain power at some point.  As part of this they have released a short note setting out their views on the form that competition (or “antitrust”) policy should take.

Some of those views seem fairly reasonable, up to a point. In particular, US antitrust enforcement probably has been a little bit too lax over the past decade or so, such that some tweaks could be entirely justified.  It is also likely to be very useful for a competition authority to determine how accurate its own assessment of the merger was by seeing what actually happens a few years after the merger.  This ex-post evaluation of mergers (i.e. waiting a few years, analysing data that cover those few years to see what actually happened after the merger and comparing it to what the competition authority originally thought would happen) can be a useful tool to examine the effectiveness of the approach used when assessing a particular merger.  This is something that should probably be conducted more often (note that such ex-post reviews are undertaken fairly regularly by the UK and EU competition authorities, but this seems to be a less regular thing for the US), but it is important to note that it does not require the constant monitoring of the merged entity post-merger, but instead only requires the collection and analysis of data at a point in time a few years after the merger.

One somewhat novel aspect of the Democrats’ proposal is that the merger review process should also take into account the impact said merger would have on the merging firms’ suppliers.  Currently, the merger review process focuses almost entirely on the impact of the merger on consumers (in some vertical mergers, the impact on suppliers is considered, but only really insofar as an immediate impact on those suppliers could eventually feed through to an impact on consumers) – this focus on consumers mean that competition authorities focus on “consumer surplus”. 

This consumer surplus is just one component of societal welfare, with the other being “producer welfare” – this also takes into account the profits obtained by producers.  In the context of mergers, producer surplus usually refers to that of the merging firm, but can also be extended to the merging firms producers as well.  Whether or not one focuses solely on consumer welfare or also cares about the welfare of producers is a subjective matter, but seeing as the vast majority of mergers do not lead to the merged firm having substantially higher bargaining power with its suppliers then incorporating producer surplus into the merger review process seems unlikely to have a substantial impact.  (Note that a merged firm obtaining increased bargaining power over its suppliers is one of the potentially beneficial aspects of a merger – if the merged entity can negotiate for lower prices from its suppliers, it could then decide to pass on those lower input costs to its own customers in the form of charging those customers lower prices.)

Other aspects of the Democrats’ proposals are less welcome - indeed, a number of them certainly appear to go much too far and seem to be driven (at least in part) by a reactive media that holds the simple view that “big is always bad”. (As an aside, it is interesting to note that the same commentators railing against large firms do not realise that any individual can submit a complaint to a competition authority themselves – it would be nice if one or two of these commentators actually acted on their convictions rather than just complaining all of the time. Of course, this would require said commentators to provide a coherent explanation regarding how consumers are harmed - something I suspect that they would struggle to do).

For example, and rather bizarrely, the policy appears to be aimed at conglomerate firms/mergers – i.e. at firms that operate in many different distinct markets. (This factor is probably part of the reason for some commentators’ objections to the Amazon / Whole Foods merger – namely, they claimed that it was “bad” that Amazon was getting bigger by acquiring a firm that operated in an industry in which Amazon was not already present.) However, the Democrats’ proposal in this regard is unnecessary - most merger review guidelines already incorporate an assessment of the “conglomerate effects” that could arise from such mergers, such that these factors are already taken into account (and given appropriate weight) during the merger review process. 

Despite this, the Democrats’ proposals actually suggest putting the burden of proof on the merging firms in some cases – i.e. the merging firms would need to prove that the merger would not be harmful, rather than the other way around.  This would mean that the merging parties would need to provide even more evidence to the competition authorities, incurring even higher costs, and further enriching the lawyers and consultants that are hired on behalf of the merging firms.  Even worse: given that firms deciding to merge will take into account the costs they would need to incur in obtaining approval of their merger, if those costs prove too high and outweigh the firms’ benefits of merging, then mergers that could have benefitted consumers would be less likely to happen.  To add to this, it is notoriously difficult to prove that pro-competitive effects are likely to result from a merger – doing so requires satisfying a number of strict criteria for which evidence is generally not readily available and even if the data are available, it requires a lot of work (and, hence, costs) in order to make a strong case. It is rather incongruous that the Democrats would be in favour of reversing the presumption of innocence just because a firm is already large; presumably they would not do the same for individuals just because of the characteristics of those individuals, so it is very disconcerting that they wish to do the same for certain firms.

Furthermore, in addition to ex-post reviews of the effectiveness of the merger review process, the Democrats have actually proposed continued monitoring of merged firms (and the industry in which they operate) to try to ensure that a market remains competitive after a merger.  This is akin to proposing a behavioural remedy along the lines of “make sure you compete how we want you to or we might unwind the merger”.  There is a very good reason that competition authorities tend to eschew behavioural remedies – they are extremely costly to enforce. 

Specifically, they require a well-defined (but potentially over-prescriptive) set of goals that the merged firm needs to meet, people to monitor constantly the merged entity’s activities (or someone to whom customers can report any concerns) thereby incurring substantial costs, and are not guaranteed to work in any event since the monitors might not be able to view the merged firm’s actions with perfect transparency.  For example, the competition authority might say that the merged entity cannot charge a price more than 20% above its costs – this is a restriction on the behaviour of the firm that would require the competition authority to:

• define exactly which price(s) and cost(s) should be taken into account;
• be able to view with near-perfect accuracy the prices and costs of the merged entity; and
• monitor continuously the prices and costs of the merged entity for an indeterminate (or set) period of time.

Depending on the industry, one, two, or all three of those criteria might not be feasible.  Hence, it is unrealistic to suggest that the correct approach to competition policy should involve greater use of behavioural remedies. 

As such, although an argument can be made that the merger review process in the US could do with some improvement, and the Democrats’ proposals do have some interesting and worthwhile aspects, the fact that much of their proposal goes too far and contains a number of unjustified suggestions indicates that implementing these proposals would probably be a bad idea.  

The Sun Tyrant

Jean Paul Floru has written a fascinating and well-informed account of North Korea.  It is deeply disturbing.  The book, The Sun Tyrant (Biteback 2017), is absorbing throughout.  JP combines his personal experiences of a recent visit with well-researched data, anecdotes and commentary by others, including defectors, to build up a graphic picture of what life is like in today’s living embodiment of Orwell’s 1984. 

It is a horrifying portrait of totalitarian control, of a people brainwashed from birth into adulation of brutal dictatorship that imprisons or executes people at will for such offences as failing to show sufficient respect to the great leader’s statue, or in one case, of leaving a newspaper with his photograph lying disrespectfully on a bench.

The people starve, or survive by eating tree bark and grass.  They have none of the economic amenities taken for granted in the developed world, such things as electric power in hospitals, or hot water to wash in.  They have to live where the state tells them to, and are forced to work in jobs they are assigned to, even if they have to do so without being paid for months. 

They are sustained by a propaganda machine blaring from loudspeakers and glaring from lurid posters, that tells them that American imperialism and Japanese lust for conquest threaten their existence.  The war threat motivates the populace to accept sacrifice and deprivation.

This is the nation developing nuclear bombs and intercontinental missiles.  One is left at the end of JP’s excellent account with the feeling that this will not end well.  It is a gripping read.

If recycling doesn't work then why not stop recycling?

A quite delightful tale of a complete failure to understand what the universe is telling you from Australia:

Hundreds of thousands of tonnes of glass are being stockpiled and landfilled instead of being recycled, threatening to seriously damage the community's faith in the billion-dollar recycling industry.

Key industry insiders interviewed by Four Corners have described an "unsustainable situation" with glass which has "nowhere to go" because there is "no viable market".

Australia consumes about 1.36 million tonnes of glass packaging per year: wine and beer bottles, glass jars and containers.

Glass consumption is at its highest in New South Wales, which produces about 460,000 tonnes of used glass per year.

One recycling company, Polytrade, has decided to go public in an effort to raise awareness about the issues being faced by industry due to what it describes as a failure of regulation.

Yes, you're right, it does indeed end up as a demand for subsidy.

But as we've pointed out before there's a larger piece of pigheadedness here. There's nothing wrong with recycling of course, but then again nor is there inherently anything good nor holy about it. When it saves resources this makes us richer, when it doesn't save resources it makes us poorer. We should thus want to do it when it makes us richer and we have a good guide to that. If it is profitable to do then that profit is the amount it is making us richer and thus we should be doing it. For profit is the amount by which the output is valued at more than the alternative uses of the inputs.

This is not to say that market prices are perfect of course. There are indeed things they don't contain, public goods and externalities. But they are already corrected for, Oz has a landfill tax. And yet still glass recycling loses money - therefore we shouldn't be doing glass recycling.

Not that we see much problem with landfilling glass to be honest. Glass is, after all, merely boiled sand and if we're digging up sand to make glass then we've a strong assumption of having a hole to put used glass into.

Some recycling is just bonzer but the type, as here with glass, that makes us poorer, uses more resources, just shouldn't be done. That the process makes a loss is the universe's way of trying to tell us this.