An absurd part of the IPPR's demand for economic justice

The IPPR's report on economic justice is a target rich environment. We must, apparently, have more of our economy in manufacturing, failing to note that manufacturing as a share of the global economy is falling. More of the economy must be paid in wages and salaries, failing to note that the decline of the labour share is nothing to do with profits at all, it is because VAT rates have risen, as has self-employment. We could go on and we probably shall at some point. But this is simply ridiculous:

 By 2030, the British economy will have closed the gender pay gap and the ethnic pay gap.

The gender pay gap we have is not because men and women are paid differently. It's because, by and large, men and women do different things when they become parents. Thus the average pay of men and women varies because of the discrimination done by people about how to live their lives.

Fathers earn more than non-fathers - yes, after we've corrected for age, education and all that. Mothers earn less than non-mothers among women, again correcting for everything else that might vary. At least one study has found that there is no gender pay gap at all, it is purely and only the familial position which matters, primary child carer or not. That explains everything which needs to be explained, alone and unadorned.

Thus the demand is that in only 13 years' time we will have half of fathers being the primary child carer? We do think that's possibly a bit more of a social revolution than is likely to happen.

The aim is laughable because they've not understood the reason for what they are observing, never a good basis for policy making.

To really rip off the people you need to be a government

The Guardian is making much of this Azerbaijani Laundromat, the idea that people linked to - allegations as yet of course - the government of Azerbaijan have been using banks and limited companies to siphon money off to do all sorts of things.

Azerbaijan’s ruling elite operated a secret $2.9bn (£2.2bn) scheme to pay prominent Europeans, buy luxury goods and launder money through a network of opaque British companies, an investigation by the Guardian reveals.

Leaked data shows that the Azerbaijani leadership, accused of serial human rights abuses, systemic corruption and rigging elections, made more than 16,000 covert payments from 2012 to 2014.

We have no idea of the veracity of any of this, of course. But assume whichever way you prefer, it does show one thing. That to truly rip off the people you need to be the government. Only in that manner is it possible to actually force people into coughing up for such payments. Everyone else, however greedy a monopolist even, has to produce something of value in return in order to cash in.

This is thus a warning about government access to our wallets more than anything else - not a point we expect The Guardian to be making any time soon.

After Brexit, let's take the lead in free trade with the developing world

I have a piece at the Times's Red Box that argues that, after Brexit, the UK should grant full tariff- and quota-free access to its markets to many of the world's poorest countries:

The EU’s Everything But Arms (EBA) protocol came into effect in 2001 and applies to the world’s least developed countries as defined by the United Nations. Along with Haiti and a few Asian countries like Bangladesh and Cambodia, most of these countries are in sub-Saharan Africa, like Ethiopia and Mozambique. All imports except armaments from these countries face zero tariffs (taxes on imports) and quotas (rules limiting the number of items that can be brought in in a particular year). In 2014 goods from these countries accounted for €17bn worth of imports to the EU.

Countries that are still very poor but slightly more developed, like Vietnam, Kenya and Nigeria, face the Generalised System of Preferences (GSP) regime, which give preferential access to European markets compared to that of a normal “most favoured nation”. For better market access, countries must implement 27 international conventions on things like human rights, environmental protection and good governance.

The GSP is better than nothing but still holds back trade and growth. Unprocessed coffee bean imports from Kenya are not taxed, but roasted beans are at a 2.6 per cent rate. So are cut flowers and vegetables like broccoli and beans, which can face tariffs of up to 10.1 per cent. Rules like this inhibit the development of supply chains and stop value from accruing in the producing countries. And they make British consumers worse off through higher prices.

The British government has already said that it wants to continue giving preferential access to developing countries after it leaves the customs union. This is good, but we can do better. If we accept the principle that free trade makes both parties better off, it should aim to extend the zero-tariff and -quota Everything But Arms protocol to many more countries, along with less strict enforcement of rules of origin customs checks.

Read the whole thing.

Well, at least this is a non-stupid way of doing it

We have made much here, over the years, of the merits and non-merits of recycling. If the activity is profitable then do it by all means - and if it is profitable then no one need be subsidised to do it nor forced to either.

If it's not profitable then don't do it, unless there is some compelling third reason - we're just fine with the idea that radioactive waste should be cleaned up at an accounting loss for there is still an economic profit in there. That doesn't apply to plastic bottles and the like so landfill is the best solution. Aluminium cans are a little different, in that once collected they are indeed profitable to recycle but those collection costs can make them not so.

Having said all of that about the task that is being undertaken this is at least a non-stupid way to achieve it: 

The Scottish government is planning to introduce a deposit return scheme for bottles and cans.

Customers would pay a surcharge when purchasing bottles or cans under the programme, which will be refunded when they return them to a shop.

Assume, in violation of our strictures above, that we really do want to recycle everything or near it. The way to do it is to make recycling have a positive value. Instead of browbeating everyone into a particular form of behaviour, or providing 7 plastic bins for each family, simply charge a returnable deposit. Some combination of Bob a Job week, professional scavengers and pocket money will then ensure that the collection to the recycling centres happens.

Or, as we might put it, the solution to a problem that markets unadorned are not solving is to use markets to solve it. Stick in that crowbar of what we could variously call either a deposit or a Pigou Tax and we're done. Make doing the activity have a positive value, not doing it a negative one and leave human nature to deal with the rest of it.

As before, whether this needs to be done is another matter but we should indeed give credit to people rediscovering the old system which does have the merit of actually working.

For efficiency’s sake, let’s tax the young less.

In The Millennial Manifesto, the ASI’s President Dr Madsen Pirie advocated a series of policies that the Conservatives could implement to win over young people attracted by Corbyn’s radical socialist manifesto. Like many ASI reports it advocated tax cuts, but controversially Madsen argued that we should cut taxes on the young. In particular, it argued that for under 25s, we should abolish air-passenger duty, create a lower band of national insurance at 8% (instead of the 12% it currently is), and bring in a 50 per cent council tax discount (on top of the current student exemption).

When Madsen speaks politicians are wise to listen, and today we have Conservative MP Nadhim Zahawi advocating that to win over young voters the Tories should cut their income taxes. Nadhim goes further than The Millennial Manifesto by suggesting that for as little as £2.4bn we could cut the basic rate of income tax for under 30s to just 10%.

It’s easy to dismiss targeted tax cuts for young people as just another bribe. But as my colleague Ben argued persuasively in The Times, people vote for the good of the country not for election giveaways.

However, there’s actually a serious economic logic behind it, going back to a paper by legendary mathematician, philosopher and economist Frank Ramsey in 1927. Ramsey argued that the optimal consumption tax (optimal in the sense it caused the least possible distortion) would vary depending on the supply and demand elasticities of each different good. Goods where big changes in price have little effect on overall consumption should be tax heavily, while goods which are incredibly responsive to prices changes should be taxed lightly. That’s part of the reason why cigarettes and petrol are taxed more heavily than other goods (heavy even accounting for negative externalities like pollution and the burden on the NHS). Smokers and motorists make good cash cows because few of them stop driving or quit smoking in response to higher prices at the pump or the tobacconist.

Ramsey’s insight does not simply apply to sales taxes, it applies equally to taxes on labour income. Each individual has a different response to wages and taxes. Elon Musk for instance would probably still work on Tesla and Space X all day if he had to pay a 95% tax rate. Others might choose to cutback their hours or pick a more relaxing lower-paid job at such high tax rates. If the goal is to raise revenue without slowing growth, the aim should be to tax ability but not effort.

We currently tax income, which is a function of ability and effort. But if we wanted to maximise growth we would tax ability and not effort. We can imagine all sorts of dystopian systems where people are tested at birth and those with the genes for hard work or high intelligence are assigned a higher tax rate than those lacking. Or given that taller people on average earn more we could simply use a ruler. Economists call this tagging.

But there’s an even less intrusive way to tax ability more and effort less – age-based taxation. The average middle-aged person is more productive than the average young person. By picking up experience on the job middle-aged people are able to access senior management roles that are typically not open to younger employees. We could tax graduates more and non-graduates less, because on average that’d hit high ability but not necessarily high effort individuals more. But the problem is that it’d discourage studying in the first place. Ageing is different; it’s very difficult to avoid turning 30.

But it’s not simply ability that we care about. It’s also the willingness to work and to move countries. It’s harder for a middle-aged person to flee Britain’s taxes than a young person. Middle-aged people typically have families to support that they can’t simply uproot and some countries even have age-related penalties in their immigration system. Young people typically have a smaller incentive to seek out high-paid work. They could seek out further study or go travelling. And the wage gap between a high-paid but unfulfilling job in finance versus a low-paid but fulfilling job in a charity is smaller for young people than older people.

For those reasons, cutting taxes on the young and raising them by the same amount on the middle-aged would likely boost output. Cremer, Gahvari and Lozachmeur find that if you cut taxes for under 35s (and over 55s who have the option of retiring) and raised them on 36-54 year olds to compensate, you would boost overall economic welfare.

We also implicitly tax younger people more than older people already. By taxing income and not consumption. As I’ve argued previously even relatively low taxes on income can imply high taxes on future consumption from savings. This in effect shifts the tax burden from early work to later work.

Tagging is certainly controversial and has costs. It adds complexity to an already complex tax system. But there’s a clear, if unintuitive, economic rationale beyond simply bribing younger voters. So for the sake of efficiency not intergenerational justice, let's tax the young less.

We’ve launched our ‘Secrets of the Magna Carta’ educational project!

Magna Carta may be an 800-year-old piece of parchment, but today many people think that it is more relevant than ever. The Great Charter spelt out the rights of citizens and the limits to a government's power over them. With the expansion of government in the last hundred years, and political decisions affecting every part of our lives, do we need to look again at what this old parchment can tell us?

In association with WAG TV and the John Templeton Foundation, the Adam Smith Institute is proud to launch our Secrets of the Magna Carta educational project. We’ve created teaching materials to accompany two award-winning documentaries narrated by Downton Abbey’s Hugh Bonneville. They feature world experts: lawyers like US and UK supreme court justices, distinguished historians, librarians in charge of conserving the documents themselves, and policy commentators from both sides of the Atlantic.

Aimed at GCSE and A Level students, the project makes available a set of videos, teaching guides, and books to teachers and students who want to know why Magna Carta still matters to ordinary people today.

Our free Magna Carta lesson plans are tailored to UK exam board specifications for History, Politics, and Citizenship. They contain everything a teacher needs to engage, educate, and excite GCSE and A Level students: videos, quizzes, key questions, reading extracts, ideas for class activities, pre-reading, and more.

We are also in the process of translating the documentaries and teaching materials: expanding the project to the U.S., Europe, Latin America, India, and beyond. Although Magna Carta may have been sealed at a meadow in Runnymede, the principles that the Great Charter enshrined are of vital importance around the world.

Find out more by visiting the project’s website here.

Amazingly, this new $500,000 drug is the cheaper option

A new drug is to hit the US market imminently and there will be ructions for it costs $500,000 for a treatment. Don' expect to see NICE approving this on the NHS all that soon and do expect to see huge wailings and moanings about the immorality of the profit motive in saving lives.

At which point, two things one minor one major.

The minor being that this is actually cheaper than the current treatment for the same disease. It's for a form of leukemia,  the standard treatment for that if chemotherapy has failed is a bone marrow transplant which costs, in that US system at least, some $800,000. Still on this minor point about costs is the usual one about development costs. Depending upon who you believe a new drug costs $800 million to $2 billion to develop and that's without paying for the failures. It's expected that some 600 people a year will use this drug, at least in this manifestation of it. The patent will, roughly speaking, run for another decade or so.

Those just are the sums - and it's even worth noting that this isn't just some drug with minimal manufacturing costs either, it's specifically formulated, taking several weeks each time, for each patient.

The approval of Novartis AG’s breakthrough therapy for a deadly form of leukemia opened the door to a new class of treatments even as its $475,000 price tag reignited the debate on how to value potentially life-saving drugs.

And now to the major point.

Yet the almost half-million-dollar price tag on the Novartis CAR-T drug is a new benchmark, and more are likely to follow, with similar new therapies for blindness, blood disorders and other cancers. Spark Therapeutics Inc.’s gene therapy for a genetic disorder that causes childhood blindness is expected to get an agency decision by January.

There are two entirely different things going on in health care costs. As human knowledge advances there are more things we can do and cure. We also have more older people around, meaning more at that peak time of life for consuming health care. Both of those push up costs, significantly.

But we've also got this other thing going on. Something that's entirely analagous to automation itself. One way of looking at this drug/treatment is that it uses a variation of HIV to get the altered white blood cells to kill off the leukemia (no, do not take that as anything other than a very dodgy analogy) instead of the older method of killing all the marrow off and mechanically pumping new back in. We've in a sense, automated.

In the same way that an aspirin automates the previous treatment for a headache of a cool damp clothe bathing the brow in a cool dark room for some hours.

The total cost of health care, the change in it, is obviously the balance of these different effects. 

Which brings us to this oft repeated fact that the NHS has a higher inflation rate than the rest of the economy. Thus the NHS should be getting ever more money of course, even standing still as a percentage of GDP is to constrain it too much. Except, as above, we do have a process, that automation through innovation, which brings health care costs down. We also know how to encourage innovation, that happens in markets and doesn't in planned systems. Therefore.....well, we can see where the political problem is here, can't we?  

We'd just like to point out to Giles Fraser that capitalism already provides a citizen's income

Giles Fraser is musing over in The Guardian about salaries, stipends and the idea that capitalism might end up providing a citizen's income to all:

But I do know a little about how it might feel to live on a citizen’s income because the nearest real-life comparison I can think of is my own situation. I am not paid a salary by the church. I am paid a stipend. And the crucial difference is that a stipend is not supposed to be a payment received for services rendered. Rather, it is a way for the church to support its clergy so that they can do their thing without a concern for basic material welfare. There is no bonus for more bums on pews. There is not a quota for souls saved. Being a priest is not really a proper job – it’s not something that can be measured in terms of task. The stuff I absolutely have to do, task-wise, is pretty minimal. Even so, the church gives me a place to live and pays me every month.

Entirely fine, of course, how other people organise their lives is no concern of ours. We would note though that people who write a regular column in The Guardian, yes, even in The Guardian, do gain an income thereby, it being quite tightly linked to the work done to produce a column at the requisite intervals. Several of us have been paid by the newspaper for producing irregular such pieces in fact.

But it is here that we would really like to point:

Optimists argue that new jobs will be created, just like they were during the Industrial Revolution and the computer revolution. After all, if no one has a paid job, who will be buying all the stuff that the robots are busy making? Others suggest that with all this robot-led productivity, societies will become rich enough to pay their populations a citizen’s income – that is, provide everyone with an unconditional sum of money to live on, irrespective of whether they work or not. This is an idea that may be approaching as fast as the driverless car. From the Trump-supporting tech CEO Elon Musk to the lefty Greek politician Yanis Varoufakis, the idea of a basic citizen’s income draws support from across the political spectrum.

Now, I am not an economist, and I don’t know whether the sums will ever add up to make it work.

Our point being that capitalism is already that productive, the sums do add up and we do already have a citizen's income. It not being necessary to be an economist to work this out, just a tad of history and the ability to add up being sufficient.

The history being that the average human income, lifestyle, over the millennia since the invention of agriculture has been about $2 a day (this is, annoyingly, in 1992 dollars, not today's, so adjust up to perhaps $3 if you prefer). This really is saying that the standard lot of people has been to live on what you can buy for $2 (or $3) in Walmart for the day, including food, heating, clothing, health care, housing and saving for that pension you'll not reach. It's also around and about what we describe as absolute poverty in a global sense these days.

Then came capitalism, around 1750 or so. With the result that today we do in fact pay a citizen's income. In the US, for example, the average food stamp payment is $29 a week. That's not the maximum, not at all, that's the average that a recipient of any at all gets. We agree it's not very much but it does, just that food stamp allocation alone, put you into the top 50% of all income earners globally. Yes, properly adjusted for the manner in which things cost different amounts in different places.

Here in the UK the jobseekers' allowance is £75 a week or so. Or, enough to put you, alone and unadorned, into the top 25% of all global income earners. Or, again alone and unadorned, somewhere up at perhaps 5 times that average historical living standard.

And what is that if it isn't capitalism becoming so productive as to provide a citizen's income? 

In which we shoot down a carefully constructed theory with one simple fact

We have another repeat of this idea that CEO pay is just terrible, terribly high that is, and that this leads to all sorts of errors and problems:

This is where the link to excessive CEO pay comes in. These complicated pay packages are structured to produce huge bonuses if share price targets are hit. The majority of shareholders are pretty impatient with businesses that do not deliver regular and repeated earnings increases over the short and medium term. The sort of long-term investment that might raise company performance many years from now, boosting productivity and wages for ordinary workers, is harder to push through. This in part explains why corporate Britain is notoriously sitting on a “cash pile” estimated to be as large as £700bn.

Instead of investing, what do corporate leaders do with all this cash? They pay “special dividends” to their shareholders, or buy back their own shares, thus boosting the share price and ensuring that their bonuses (so-called long-term incentive plans) will trigger a bonanza in two or three years’ time. That’s right: “long-term” is no more than five years away. Welcome to the dysfunctional world of high finance.

While the prime minister is in Japan this week, she may learn something about the patient, long-term support for investment and “continuous improvement” that helped build one of the most powerful economies in the world from the ruins of war. It is a country, incidentally, where the gaps in pay between corporate leaders and their employees are a mere fraction of what they are here.

The first problem with this comes in that middle paragraph. For there is an assumption that that cash paid out to investors in dividends or buybacks somehow doesn't do anything. Once it has fled the corporate coffers then that's it, gone.

Except of course that isn't what happens at all, the investors who receive it can do one of two things with it, spend it or invest it again (the number sticking it in a vault to bathe in being rather small). Investing again might well see it going into new and or small businesses, where more than all of the employment growth is, most of the economic growth and a very large part of the technological advance.

The second problem is in that last para - here is good research showing that Japanese companies do worse precisely because of the method of selection and payment of their CEOs.

The third problem being in the first. A share price is the net discounted value of all future revenue from the ownership of it. Boosting short term results at the expense of the long term therefore doesn't work - or shouldn't. At which point we need to test the idea. And as ever with a theory (let's pretend at least that we're talking about science here, not politics) all we need is one refutation to shoot it down. Do we have an example of a concentration upon that long term, at the expense of current profits and dividends, increasing the value of a firm, not decreasing it?  

At which point our simple fact. Amazon. The company doesn't really make profits, certainly it has never made an economic one (accounting, yes, but the two concepts are a little different, an economic profit is one above the general return to capital), never paid a dividend and as far as we're aware stock buybacks are limited to the need to feed the stock options and awards program, no more. It is also, after a couple of decades of this behaviour, one of the most valuable companies on the planet. Its CEO one of the richest men on it.

The stock market rewards that investment for the long term. The CEO having stock seems to increase that focus on the long term, sacrificing current profits and dividends to invest further increases the share price. 

The theory is wrong.

Change minds, change the world!

I’ve often wondered why people want less immigration. Could it be that they believe that immigration will hurt their job prospects or wages? Put too much of a strain on public services? Commit crimes, or change our culture or politics for the worse? 

If you think the sort of immigration rates we’ve had in Britain since the mid-2000s are good, as I do, you want to change the minds of people who don’t. Hell, you want to know if it’s even possible to change their minds. Maybe arguments and ideas don’t really change anything.

I’ve blogged before about a working paper that may show that you can change people’s minds:

We observe that participants in the treatment group update their beliefs about immigrants, and they donate more money to a pro-immigrant charity. These effects are fairly large, and they correspond to a change of approximately 0.25 of a standard deviation. Moreover, these effects persist even four weeks after the treatment. 

However, participants who receive the information treatment do not become more supportive of immigration reform. Indeed, they do not become more willing to sign a petition in favor of immigration reform, and their self-reported policy preferences remain broadly unchanged. Still, they are less likely to state that there are too many immigrants in the U.S.

Furthermore, we find that Republicans respond more strongly to the information treatment, both in terms of their views on immigrants and in terms of their policy preferences. Indeed, Republicans who receive the treatment become more likely to report having signed the petition in favor of immigration, and they become generally more supportive of immigration. Similarly, we observe that people who are initially more worried about immigration react more strongly to the information we provide them, and they update their views on immigrants and immigration more drastically than people who are less worried about immigration.

From Japan, with quite strict restrictions on immigration, we have a paper that finds that information campaigns about the potential socio-economic benefits that come from immigration do shift people’s views quite a lot:

Depending on the treatment, we find that this exposure led to increased support for allowing more immigrants into the country by 12-21 percentage points, or over 70% above the baseline rate. The treatments also motivated citizens to take political action in support of a more open immigration policy. Notably, while smaller in magnitude, many effects also persisted 10-12 days after the treatment.

From Norway, a Master’s thesis based on a randomized experiment investigating ‘framing effects’ (a concept I don’t think is very useful, but never mind) around whether people are told that ‘just’ 60 percent of immigrants are in employment, or that 7 percent are unemployed. (Others may be students, children or retirees.) Does positive-sounding information move people more or less than negative-sounding information? 

In my first hypothesis, 𝐻𝐻1, I posited that it is more likely to find statistical significance for the negative framing than it is to find statistical significance for the positive framing. I found support for this hypothesis in both my regressions, and phenomena of loss aversion, “losses loom larger than gains,” and a negativity bias may explain the results. Other explanations include the fiscal burden hypothesis, that people fear higher taxes or lower benefits, and social identity theory (Tajfel & Turner, 1986). In the latter case, by accentuating certain features of immigrants (work status/race/origin) in a frame, one reminds respondents of the out-group status of the immigrants. This reminder strengthens the in-group mentality, and a negative frame may thus strengthen the disfavor of the out-group.

In 𝐻𝐻2, I asked if it is more likely to find statistical significance for the negative impact framing than it is to find statistical significance for the negative behavioral framing. I found that for views on the cost/benefit of immigration, both treatments were statistically significant, though negative impact framing (p<0.01) more than negative behavioral framing (p<0.05), supporting the hypothesis. However, this variable pronounced weaknesses of experimenter demand effects. 

For immigration liberals like me, this is a sign of the importance of challenging negative untruths about immigrants.

And most recently, a paper by one of the same authors as the first study. This finds that if you do change people’s beliefs about how immigrants affect the labour market (ie, they typically do not hurt natives’ wages or job prospects) with, in this case, information about the Mariel Boatlift, you can substantially shift their views about immigration policy:

we find that a one standard deviation change in beliefs about the economic impact of immigration changes attitudes towards allowing more immigration by between 0.5 and 0.6 of a standard deviations. Through the use of real online petitions, we also find that changes in attitudes affects real political behavior. Finally, we find that the effects persist in an obfuscated follow-up study where differential demand effects across the treatment and control group are of no concern. Overall, these findings challenge the current consensus that labor market concerns are not a quantitatively important determinant for immigration attitudes.

These studies all seem to back the ‘naive view’ of opposition to immigration, which is that it is motivated by what people tell us it’s motivated by– like jobs, wages and welfare – and not the view that people are actually concerned about racial or cultural change but are afraid to admit that to a pollster. And they’re evidence that honest debate is worth engaging in if you want to change people’s minds and public policy. Nice one!