A fascinating result from China about economic mobility

As we all know the Chinese communist revolution entirely appropriated all private wealth. As we all also know it has been possible once again, for these past few decades, to make private wealth again. We've thus a good test of that old question, is it simply happenstance that some people have more wealth than others or not? 

That is, once the redistribution has happened do we get the same old people accumulating the wealth again or is it some completely different group that then prospers? A claim at least of an answer out of China:

Virtually every Chinese millionaire or billionaire is self-made because capitalist reforms to the centrally planned communist economy only began in the early 1980s and did not really take off until the 1990s. But the modern super-wealthy often turn out to be descended from an earlier capitalist class. Richard [Liu] is no exception. Before the 1949 revolution his family were wealthy shipowners who transported goods along the Yangtze river and the ancient imperial canal from Beijing in the north to Hangzhou in the south. They lost everything when the communists took over and were forcibly resettled at least twice. One academic survey found more than 80 per cent of Chinese “elites” (those with income at least 12 times higher than the average in their area) are descended from the pre-1949 elite. Richard puts this down to “family culture”.

“My parents and grandparents taught us a lot — not Chinese or maths but a sense of values, of how you should be and how you should treat others,” he says. They also drilled into him the knowledge they had once been very rich but everything had been taken away — a lesson all too relevant even now.

Do note that no one is saying that it's genetics or anything so immutable, only that it is the basic culture, the familial upbringing if you prefer.

It's an answer to the question, one of the very few that we've got in any empirical sense, so sad that it's not the one that the redistributors are likely to want to hear. That there is something distinctly non-random about who ends up with said wealth.

The one single economic fact we have to explain

There's a new, and free, economic textbook out there, coming from the Core project. David Henderson likes some of it and not other parts. Which is or course just how it's going to go, no one is ever going to get the entire subject between the front and back of just the one book, that's why we've libraries packed with nothing but the subject.

However, it does place useful emphasis on the one single economic fact we've got to explain, in this chart here and used above as our image. If you want the numbers themselves then Angus Maddison is a good source. This thing we've got to explain being the economic hockey stick.

Starting around 1750 something began to happen to living standards in Britain. They started to rise, substantially, for the common man, and sustainably. This is something that had never happened before in human history. The unique occurrence then became less unique, the system which produced it, whatever that system was, spreading and producing the same or similar rises wherever it spread to.

This process is still going on - what we today describe as absolute poverty, that $1.90 a day out there, is roughly and around and about what historical living standards were before this unique occurrence, everywhere.

As the economic historian Brad Delong has been saying these decades, as Dierdre McCloskey has been emphasising, this is the one great fact we have which must be explained.

Of course, we have different names for this, the Enlightenment, the Industrial Revolution,   capitalism perhaps, the destruction of the guild economy and its replacement with free markets possibly. We could also call it the increased immiseration of the proletariat, the greater exploitation of the worker by the employer, as indeed some do. 

But we're still left with this one fact. Human life, in material terms, started to get better for the first time as a result of this occurrence. And no economic explanation, indeed no explanation of any sort, which cannot explain why this did happen is of any value at all.

This is not to say that our explanation has to detail why at this time in this place, not at all. But it does have to explain to us why living standards, for the first time ever, started to rise. We've thus a handy shorthand by which to measure economic, or any other, explanations. If they tell us why we've gone from $2 a day to $100 (yes, obviously, after inflation) then they might have some element of the truth to them, if they do not then they can be rejected immediately.

That this change has only ever happened in places with some modicum of capitalism and markets does indeed make deciding upon the merits of the varying explanations rather easier.

This is a mighty piece of chutzpah even by the standards of political lobbying

The booksellers want us all to know that they're very hard done by. The tax system perversely benefits Amazon, not they themselves and Something Must Be Done.

British bookshops pay 11 times the rate of corporation tax paid by Amazon, according to a report that has prompted outrage from booksellers.

They also complain about the business rates system, of course:

The report, from economics consultancy the Centre for Economics and Business Research (Cebr), also revealed that UK bookshops pay £131m in tax (including £12m in corporation tax), equating to 91p per £100 of turnover, which is 11 times the amount of tax paid by online retailer Amazon, which contributes 8p per £100 of turnover.

The rates system we've dealt with elsewhere. Rates are a tax upon the landlord of the property you use. If you're using more expensive property, as a retail footfall place will, then your landlord will be charged more tax.

But the real joy to us here is of that argument about corporation tax which is, as we know, a tax upon profits. Usually the complaint is that the existence of profit means either that the consumer is being ripped off or the workers are not gaining the full value of their labour. Amazon doesn't do this both by lowering prices to the consumer and also paying its staff very well.

This is an outrage of course. 

Which is where the chutzpah comes in. The booksellers are actually both insisting that they make more profit than Amazon - at least on a turnover basis - and that they are thus enriching the capitalists more than Amazon does, plus demanding that something be done about this appalling state of affairs so that they can continue to enjoy their higher profit margins.

What is it about the concept of a tax upon profits that they've missed? 

American income statistics aren't quite what people are saying they are

The latest numbers for incomes, health insurance and poverty are out in the US. This is one of those times when we've got to really understand how a statistic is calculated before we can work out what it's really telling us. And here what it is telling us is not what some people are saying it is. Take Catherine Rampell at the Washington Post:

One of the more striking parts of the U.S. Census Bureau’s 2016 income, poverty and health insurance report is its data on income stagnation. While incomes went up in 2016, the current median household nonetheless brings in about as much as its counterpart in 1999 did — that is, around $59,000 (in inflation-adjusted dollars).

If you look at men’s earnings alone, though, the trends are worse.

Today’s full-time, year-round male worker earns a median of $52,000. That’s roughly what his counterpart made in 1972.

This is equal to the statement, the same as the statement, that the lifestyle you can buy on the median male wage is the same now as it was in 1972. Which is a statement of such utter ridiculousness that merely restating it that way shows that it must indeed be wrong. Some of us were around and adult back then and it really wasn't that way.

One problem is that of how this income is being measured. Which is to leave out crucial parts of compensation - most notably the health insurance and pensions contributions that people gain from going to work. It's entirely true that health care has gone up in price over these decades but it's also true that it has got a great deal better. We do live longer lives, we live healthy lives for longer, now than then which is, at least we would assume it to be, an increase in lifestyle and therefore of any real measure of income.

But the biggie here is the measurement of inflation. These numbers are, of course, adjusted for such. But they are adjusted by a variant of the CPI. And we know, absolutely, that the CPI is wrong. By, depending upon who you talk to, anything between 0.5 and 2%. Always, but always, over-estimating inflation.

The biggest problem being, and we've not really got a solution to this either, practically or conceptually, the prices of new things. To get an inflation level we want an average inflation level. Sure, that health care rises in price but food much less so, we've even seen significant deflation there at times. Our method is to work out how much the average family spends upon food (say, 12% for American households today, around and about), how much for health care (umm, 20%?) and then multiply their respective inflation rates by that basket composition. If we consumed the same basket of goods over time then that would work just fine.

But of course we don't consume that same basket. The smartphone, with the iPhone, is a decade old now. When it first came out it wasn't in anyones' consumption basket. After a year or two it was in those of some people but not enough for us to say that it was a common enough purchase that we should be measuring that inflation - or crucially here, deflation - rate. By, say, 5 years in and the flood of Landfill Android a smartphone was an average purchase and so made it into the basket we use to calculate that average inflation rate.

But the iPhone started at $500 (??) and by the time a smartphone was in the inflation basket it was what, $50? And this is true of all new products. ABS started out only on the most expensive cars - is it even possible to buy one without it now? And at what point in the price drop for the technology did it enter the consumption basket we use to measure average inflation? The tumble drier, central heating, microwaves - all new technologies suffer from this problem and as above we've no real method of solving it.

But look what happens to real incomes if CPI is 2% overstated for 45 years - correcting for that means that what we're recording as the same has in fact more than doubled. Even just the 1% over 45 years gets us close to a doubling and that strikes us as much more representative, somewhere in between those two perhaps, of the development of the average lifestyle that can be afforded on the male American median wage over that time period.

It's entirely obvious that in any way that matters, looking at consumption possibilities, that US male wages have not stagnated for 45 years. Which just leaves us wondering why so many seem so gleeful in telling us that they have?

Greetings everyone!

Since I started my A-Levels I knew I would go on a gap year, but I didn’t want to do it for the sake of doing it. I wanted to do something that would be enriching for me as a person and my future career. Now, I have been a neoliberal from the day of my first social science class (in Denmark social science is a combination of politics, economics, international studies and sociology) and I therefore knew that I wanted to do something that would help change the world, even if it was a small dent, to a freer and more prosperous place.
As a Local Coordinator for European Students for Liberty I got to do exactly this, but it wasn’t enough for me since this was only in my spare time. Later on I searched on the internet for organisations looking to hire gap year students and the Adam Smith Institute popped up. I thought the position was perfect for me: being taught on important issues from some of the brightest heads in the UK in addition to actually working full time to promote freedom and a freer market. However, I didn’t think I would actually be able to get such an attractive position. But fortunately, I did.

In a place like Denmark opportunities like this doesn’t occur often, especially not to a neoliberal, and on top of that find a place whose beliefs you share is extremely seldom.
I’m very passionate about educating the public on neoliberalism and the ideas behind and, hopefully, change people's minds in the process. I also think that it’s important to educate the youth on these matters since they play a huge part in shaping the future. Therefore, I was happy to see the launch of ASI’s ‘Secrets of the Magna Carta’ and excited to become a part of ‘The Next Generation’.

Some other areas I’m passionate about include economics, consequences of the welfare state and Danish politics. Hopefully, I will get the opportunity to write about some of these subjects in the future.

I’m looking forward to my time here at the ASI and I can already after little less than a week tell it's going to be a great one.

It's just amazing how far politics and reality can diverge

Our image is taken from this Guardian piece. That famed one with the claim that there are up to 100,000 Vietnamese women smuggled into the country to work in nail bars - nail bars where they are forced into prostitution, a particularly vile form of modern slavery. That same Guardian piece which was debunked in its own comments section as being an entire phantasm.

A couple of years later there was a series of directed raids upon such nail bars. No one's surprised there were immigration offences found but of that modern slavery - and of that prostitution - not a scrap, jot nor tittle was.

At which point we get this in The Times, about the Anti-Slavery Commissioner:

Slowly, almost disbelievingly, Britain is being forced to confront the disturbing reality of modern slavery on our high streets, in homes and in criminal sectors of the economy.

We would not say that there is no slavery out there. There have indeed been prosecutions for it which have succeeded. Any slavery is too much of course. However:

That car wash in the old petrol station is good, quick and cheap, the deal in the nail bar is just too tempting and the Turkish barber offers exceptional value.

...

In the black economy, the cannabis factories hidden in houses and premises all over the country routinely employ exploited labour — often young Vietnamese men living in poor conditions. Young women and girls who came to Britain from all over the world after being promised a better life find themselves in brothels and forced to have sex with many men every day.

...

Kevin Hyland, the anti-slavery commissioner, says there is much more to be done. He wants campaigns, like those that raised awareness of domestic violence as a crime, and regulation of sectors such as nail bars. And he wants arrests. “I want to see the police doing what they are there for, pursuing the criminals behind modern slavery and putting them behind bars,” he said.

We've actually investigated those nail bars and found that while there are indeed immigration offences there's not much else there. Equally, we've investigated those sex slavery allegations and that's led to the most glorious Guardian piece ever.

The following correction was printed in the Guardian's Corrections and clarifications column, Saturday 14 November 2009

In the report below about sex trafficking we referred to the United Kingdom Human Trafficking Centre as "the police Human Trafficking Centre". The UKHTC describes itself as "a multi-agency centre" and says that it is "police led". Its partners include two non-governmental organisations, HM Revenue & Customs, the Crown Prosecution Service, the Serious Organised Crime Agency and the UK Border Agency. We referred to Grahame Maxwell as the head of the UKHTC; his title is programme director.

The UK's biggest ever investigation of sex trafficking failed to find a single person who had forced anybody into prostitution in spite of hundreds of raids on sex workers in a six-month campaign by government departments, specialist agencies and every police force in the country.

As far as being things that we can actually track and identify are concerned nail bar slavery, trafficking into sex slavery, are not things which occur in modern Britain. And we really have tried too, all 55 police forces rousted their entire patches in that Operation Pentameter. 500 odd arrests were made, most of which didn't lead to charges let alone trial and absolutely none of the arrests, charges or trials under Pentameter were for the actual crime of trafficking into sex slavery.

At which point we should note again that Kevin Hyland is the Anti-Slavery Commissioner. About the likes of whom Upton Sinclair had something to say:

It is difficult to get a man to understand something, when his salary depends on his not understanding it.

Isn't it just amazing how far politics and reality can diverge? And on our money too.

So if everyone's obeying the law in every jot and tittle we'll just have to change the law then

Here's an interesting idea from some of our friends on the Continent. Everyone is actually obeying the law, the tax system is operating exactly as it was and is intended to do. Corporate taxes are indeed taxed where economic value is being added, yea even among the tech giants. Thus and therefore the law must be changed: 

 Paris and Berlin are mounting a joint offensive to tax internet giants such as Google and Amazon based on revenues generated in EU countries, a change that would wreak havoc with many technology groups’ business models in Europe.

The first and most obvious thing to point out is that revenue based taxes don't work that well. Sure, we've VAT but that's a consumption tax, not a turnover one. Among those tech giants for example Amazon makes very little profit over time. Apple a great deal. It's difficult to see how a tax on turnover applied at the same rate to both can be considered fair to anyone at all. And a variable rate for different companies does seem to violate that equality before the law thing.

A French government official said that a turnover tax, even levied at a low percentage, had the potential to deliver a tax take that was “orders of magnitude” higher than what European governments had managed to collect so far. It is envisaged that the tax could be set at somewhere between 2 and 5 per cent of turnover, the official said.

5% would wipe out the entire profits of many a company  - both Amazon and Walmart included.

At which two more points. Firstly, the current tax system does in fact tax profits where they are "earned." It's entirely obvious that the value of the Apple brand, all that design work and so on, is created in Cupertino, thus any profits from that work should be taxed under whatever system applies there. Which is exactly what does happen at the moment.

Secondly, our Ministers gasping for tax revenue seem to have missed the very point upon which France just lost the Google case. Those ad sales do not take place in France, they take place in Ireland, that was the whole deciding fact of the case. What is this local revenue to which they refer?  

Who carries the can for adult social care?

According to its website, “the Department of Health (DH) helps people to live better for longer. We lead, shape and fund health and [adult social] care in England, making sure people have the support, care and treatment they need, with the compassion, respect and dignity they deserve.” One of the three Parliamentary Under-Secretaries leads on “care for the most vulnerable, mental health, adult social care, community care, injustices and vulnerable groups, women and children’s health, health and work [and] blood and transplants”.

That may seem a little confusing given that the DH's overall responsibilities can be divided more simply into three: medical treatment, adult social care and public health.  “Community care”, i.e. care in the community, is a subset of “adult social care” which also covers care homes – some of which are small enough to see themselves as being in the community. “Under the 1990 National Health Service and Community Care Act any adult aged 18 or over who is eligible for and requires services from the Local Authority has the right to a full assessment of their needs and the services provided should be individually tailored to meet those assessed needs." Adult vs. community care is not a useful distinction.

None of the 27 DH quangos is devoted wholly to adult social care although some, such as the Care Quality Commission which critiques both care and medical treatment institutions, have some involvement with it.  Of the 32 DH advisory bodies, only one, the Health and Social Care Advisory Panel, has some limited involvement in adult social care (“open data strategy”).

In summary so far, Whitehall’s responsibility for adult social care lies with the DH but it appears to have little capacity for exercising that responsibility.  The current fashion is to call for the integration of the NHS and adult social care.  Better linkage can indeed improve their cooperation at local level, like has happened in Manchester, but the NHS is already too big to manage and total merger makes about as much sense as merging the Titanic with an iceberg.

Much of the NHS' troubles flow from internal squabbles over how the money is spent.  At least it all comes from the DH.  In the case of adult social care however, Whitehall’s share of the funding comes from the Department for Communities and Local Government.  How crazy is that?  Suppose, for example, the DH decided to remove hospital bed blocking by transferring the savings to adult social care.  It would not happen because no self-respecting Whitehall department hands its money over to another department. The DH has responsibility for adult social care but not the finance or authority to meet that responsibility.  

Local authority expenditure in 2016/17 is budgeted at £94.1bn of which adult social care costs £14.4bn. and education costs £34.2bn.  The DCLG contribution is budgeted at 53% or £50.1bn. In other words if the total funding of adult social care and education was transferred to the DH and DoE respectively, with local authorities simply acting as agents, policy and resources would be aligned at no cost to the taxpayer.  The DCLG’s financial responsibility would be reduced to £2.4bn, and ultimately nil, which they would hate but who cares about them?

Adult social care is widely seen as an important and growing problem.  The Care Quality Commission reported “While so far the sector has been more resilient than some anticipated, we are concerned about the fragility of adult social care and the sustainability of quality.” The under-funding of adult social care is contributing to the difficulties of the NHS. At the national level, who carries the can for it?  In reality - almost nobody.  Yet this circle, as shown above, is not hard to square. If the Prime Minister could spare five minutes from Brexit, she could do so.

Don’t be scared by the elephant chart: it shows that most of us are getting richer

Despite many qualities, the Archbishop of Canterbury speaks as though he is shamefully illinformed and lazy-minded about the global economy, making hasty, ill thought out assertions about how society is so horribly unjust, and that the poor are getting the roughest deal of an economy that needs to be distributed less unevenly.

Here is the actual reality of what's been happening, illustrated in Branco Milanovic's elephant shape graph of the years 1988 to 2008. The horizontal axis shows global income percentile in terms of the world's poorest and richest people, and the vertical axis shows the real-terms percentage change in incomes.

The summary of why it's an elephant shape can be explained in roughly this way.

1. The world's very poorest (the very small proportion of people to the far left on the horizontal axis) have not gained significantly. They are the minority that have not yet been able to benefit from globalisation, mostly due to being excluded from entering the global market (for reasons like dictatorships, civil war and lacking basic human rights, but for another significant reason I'll mention in a moment).
2. The entirety of the elephant's body, ending at the top of its head, shows the gains in prosperity of all the rest of the world's poorest people in emerging countries - it's the biggest explosion of progression for the most number of people the world has ever seen.
3. The dip just after that, at the formation of the elephant's trunk, is the people in the world's most well off two dozen countries whose incomes haven't risen to the same extent - but that's primarily because: a) they are already in the top 75-90% of the world's wealthiest people who have ever lived, and have consumption and prosperity levels that even their grandparents would marvel at; and b) because much poorer people have been gaining by entering the market and being more competitive (which, if you're paying attention, is actually of benefit not just to the people in number 2, but also the people in number 3 as they benefit in terms of more affordable consumption of those goods and services).
4. The people that make up the rest of the elephant's trunk comprise the world's richest people. And as expected, they have made significant gains too, because the world's top entrepreneurs are the main people creating the jobs and opportunities for all the people in groups 2 and 3 - so of course they are going to see gains. They become better off by making large proportions of the global population better off too. And don't mistakenly think that the world's richest people are only the yacht-owning multi-millionaires - you only need to earn just over £24,000 per year to be in the world's top 1% of earners.

Milanovic's graph isn't perfect: some of the stats that comprise the low point at the elephant's trunk are also countries in significant transition periods that hit a low; and faster population growth in the economies of groups 1 and 2 means that the people at the low point at the elephant's trunk are not always precisely the same people in both 1988 and 2008.

But the general trend holds: although some workers in the 75th percentile have seen their wages fail to rise because of low-wage competition in growing economies, the vast majority of the world's population are being made better off by globalised trade, not just in terms of rising incomes, but lest we forget, in terms of consumption too (better technology, more goods and services, more affordable products, enhanced communication, fewer working hours, etc).

Finally, I said earlier that there is a minority of people in the world that have not yet been able to benefit from globalisation by being excluded from the global market due to malevolent influences in their own countries. But we cannot ignore the part that politicians in the most prosperous countries play in the continuation of their plight. The sad reality is, there are still too many barriers to free trade, as many of the people in group 1 are kept in group 1 by regulations constructed by governments of people in groups 3 and 4 to favour groups 3 and 4 over groups 1 and 2.

For all those reasons, and more, I think now would be a nice point in human history to let reality and a sense of perspective rule over half-witted, half-thought-out attacks on the free market.

Policy in Practice and interesting assumptions about welfare reform

Policy in Practice has done a "report" for the LGA about the effects of welfare changes. The result being that millions will be left wandering the streets apparently:

Over two million poor families will be more than £50 a week worse off by the end of the decade, according to an alarming analysis of welfare cuts, crippling rent rises and looming inflation.

In a bleak assessment of the plight of the poorest families in Britain, the study commissioned by the Local Government Association found that more than 84% of those set to lose £50 a week or more are households with children, either lone parents or couples. Almost two-thirds of them are working households, despite claims from ministers that they wish to create a welfare system that encourages work.

The major factor here is rising private rents while LHA numbers don't rise:

More than 2 million low-paid private renters face an average real-terms loss of £38.49 a week by 2020.

This clearly depends upon some estimation of what future rent rises are going to be. The assumption made in the report is that they will be large. On page 16, from a little under 5% a year to over 6% a year. Cumulative, of course.

ONS has private rental costs rising by less than 2% over the past 12 months.

Yes, probably best that we file this report in that round filing cabinet under the desk then. Certainly, forecasting is necessary for these sorts of things but starting from the current baseline is useful practice.