Things not to do: Introduce socialism

The claim is that socialism would bring about a fairer society than our present one. Society could indeed be made fairer, but socialism is not the way to do it, and never has been. Whenever socialism has been tried it has involved compulsion, as it attempts to make people behave in ways they would not freely choose to do.

Socialism has always led to economic deprivation and shortages. Markets allocate resources according to demand and anticipated demand, whereas socialism attempts to achieve this by planning, planning by the few instead of by the many. The rulers make their five-year plans, but the attempt to anticipate what people will want and need is always inferior in practice to the activities of entrepreneurs and businesses as they attempt to profit by meeting future demand. The spontaneous market economy is far superior to the planned socialist one. The market economies grew wealthy; the socialist ones stayed poor.

Moreover socialism has in the past led to murder, sometimes of political dissidents, and sometimes mass murder on a horrendous scale. The consensus among analysts is that socialist regimes last century murdered 100 million of their own people. Obviously the Soviet Union, Communist China and Cambodia were among the leaders, but the other socialist countries contributed to the total.

Most of those who advocate socialism tell us that it has never been tried, and that the socialist countries never implemented 'true' socialism, which is a theoretical concept yet to be tried in practice. Yet the socialist countries called themselves socialist; they acted in the name of socialism; they thought they were practising socialism; and many modern socialists are apologists for what they did. If it's called a duck, looks like a duck, has feathers and webbed feet and a beak like a duck and it quacks like a duck, it's a duck.

If only The Observer would take The Observer's advice

Peter Preston has some useful advice for the economics editors of the nation:

And what are economics correspondents there for on the big budget outing? Not merely to take the latest Office of Budget Responsibility growth figures and turn them into a uniform tale of woe. As Alex Brummer of the Mail (and before that the Guardian) very reasonably pointed out, the OBR has “a flawed track record” on forecasting– and is glooming a damned sight harder than the Bank of England and IMF.

That may be right or it may be wrong. But the point of employing economics editors is to give the audience their own special take on Philip Hammond’s figuring, not to simply transfer pages of OBR (or indeed, extra-gloomy Institute of Fiscal Studies prognostication) into holy writ. Two questions matter most. Are we really in a hole this big? And even if we are, what can we do about it?

Quite so, at which point perhaps Preston would have a little word with Phillip Inman, the economics editor of his own newspaper:

Of course, this presumes that British businesses remain strong enough to benefit from their newfound freedom to trade with whoever they want.

If Fox had listened to the Bank of England’s chief economist Andy Haldane, he would know about the UK’s reliance on a small proportion of highly productive companies and the long tail of largely unproductive “zombie” ones that tick along without making much money or paying their workers much in salary, pension or other benefits.

All economies do that, it's only ever the top 10% most productive companies (or producers) which even try to export. Entirely understandable as mediocrity is generally available across geography. We also know what the solution is - lowering trade barriers. No, not to our exports, but lowering them to imports into the country. As the Treasury has explained:

In the long term, greater openness to trade and investment boosts the productive potential of the economy. Openness increases competition among firms, allows access to finance from abroad, improves the quality of production inputs, and creates incentives to innovate and adopt new technologies.

Indeed so, the cure for low British productivity is greater openness to trade, exactly what Liam Fox is suggesting. This is not a controversial point, this is simply the way that trade works. Might be useful for an economics editor, as Peter Preston suggests, to tell us all this, no? Mr. Inman?

A really interesting complaint about Universal Credit

There is much being said about the rights and wrongs of Universal Credit and we find this specific criticism to be particularly interesting: 

Thousands – perhaps even millions – of people could have trouble obtaining a mortgage because of problems with the way the government’s universal credit system and banks and building societies “talk” to each other.

A Guardian Money investigation into the difficulties experienced by a homebuyer living in one of the areas chosen to test the new benefit has revealed that some recipients could be at risk of being turned down for a mortgage. Some lenders are saying they will not accept universal credit at all when calculating how much they will lend, while others have apparently not amended their IT systems to deal with it – leading to problems and delays. On its published list of acceptable income types, Halifax’s website simply gives a blunt “no”.

The problem is not on the government side here, it's within the banks. They are not defining Universal Credit as viable income to count when determining the size of a mortgage that might be offered. Ho hum, well, lenders should be able to decide what they wish to consider - some will undoubtedly decide differently which is one of the joys of markets.

It is possible to dig a little deeper into this though. Even to start pondering the age old goose and gander point. For when we consider wealth and its distribution (say, the canonical Saez and Zucman paper) we are told that all of the things which government does to redistribute wealth don't count.

A life long under market rate rent is not a form of wealth (of course it is), the existences of free at the point of use education or health care are not wealth (of course they are), the various insurances provided by the welfare state are not wealth (Oh Yes they are!) and even the state old age pension, an index linked annuity, is not wealth in the way that a privately funded index linked annuity is wealth (it is).

The reason these are not to be counted is that government might change its mind. Therefore all of these sources of wealth are conditional upon politics and should not be counted.

The Universal Credit is clearly and obviously conditional upon future electoral politics for whatever amount might be paid so using our Goosey Gander test it seems fair enough that it shouldn't be counted as a reliable part of income.  

That is to assume that we're all playing fair in our determinations of inequality and redistribution which might, we agree, be something of a stretch.

It is however the underlying point which we find truly interesting. We all know that there is going to be a welfare state of some form - leaving aside the odd cultist it's entirely obvious that the modern polity is going to have some form of safety net. We can and do argue about how and how generous but the basic existence is simply a reality. Given that reality the provision is going to include a roof over the heads of those who otherwise, without redistribution, cannot afford one.

The underlying claim here is that those being redistributed to should be able to buy a house on what is forcibly taken from others through the tax system. Which we do think is an interesting claim. Is there actually any substantial, or even minimal, part of the Vox Populi which would agree with this assertion? 

That the children aren't sleeping on park benches is something that near all Britons will sign up to. That the system should enable those being housed at our expense to purchase does seem to be a significant extension there and not one we'd expect to be widely supported. Given that, where did this underlying assumption come from? 

Why should people on welfare be able to get a mortgage? 

Things not to do: Introduce universal free childcare

Childcare is expensive in the UK, and takes a large slice, in many cases one-third, from the earnings of (mostly) women who want to resume work after giving birth. Its costs deter some from returning to work. One proposal in circulation is that the state should provide and pay for childcare for all parents who need it. This means the general taxpayer, including childless people and those with older children, would pay for state provision for those who need it. If it is to be universally available and free, that means it will also be given to people sufficiently well-off to be able to afford it themselves.

The government already offers 30 hours of free childcare per week for 3 and 4 year-olds, paid for by local authorities, with 15 free hours for 2 year-olds from disadvantaged families. Even this is very expensive, at an estimated £7bn a year and rising. Spokespeople from the childcare sector have said many more billions will be needed to support even this commitment. If it were rolled out as a universal free service of more childcare hours covering more years its costs would soar dramatically.

Critics of universal free childcare point out that one reason it is so expensive is that it is over-regulated in terms of the ratio of staff to children and the qualifications required for carers. Other countries manage with lighter regulations and have much less costly childcare than Britain’s.

It is quite likely that a universal free service would have even tighter regulation imposed upon it. In the interests of health and safety there would be additional regulation about premises, and further requirements for professional qualifications for those administering it – something that would also limit the supply of people prepared to supervise childcare.

Much childcare in the UK is informal, in that grandparents or other family members take care of children while the parent (usually mother) goes to work. This informal care takes place in premises many of which would not meet the regulatory requirements for nurseries, and is done by people who do not have the level of qualifications required for those who do it professionally.

Instead of imposing the vast costs of universal free childcare, government might do better to encourage more informal childcare by proving incentives for family and friends to provide it, and by directing support toward those least able to afford it.

This worries us - the new economics foundation agrees with us

As Giles Wilkes has told us all, nef stands not so much for the new economics foundation as for not economics frankly. It is thus rather worrying to find that they agree with us. Even, that we might have influenced their thoughts on a subject. For to find agreement from such a group does mean that we've got to rethink our own position.

Hmm.

So, done that, yes, we're still right, as they are here: 

There is another, more prudent and effective way of delivering the homes we need. The chancellor made positive noises about increasing the supply of land for homes. And it’s true that a lack of land underpins the housing crisis.

Well, OK, they're nearly right. We don't have a lack of land in the UK at all. Not even in the areas around London. What we have is a lack of land with planning chitties associated with it. The solution, therefore, is either to have more chitties or to do away with the need for them entirely.

Of course, nef then goes off the rails as usual:

So why is the government selling off land it already owns? If public land was kept in public hands, it could be used to back a People’s Land Bank to deliver at least 320,000 genuinely affordable homes by the end of this parliament. The People’s Land Bank could also be expanded by giving councils the powers to buy any land at “use value”, moving land that is being banked for private gain into public use. This land could then be leased out to community groups and housing associations to build homes at prices that are affordable for the local area. In one go, we could increase access to cheap land for housing, and break up a housing market dominated by a handful of developers, by getting the social sector building again.

Land is cheap, planning permission expensive. Thus reducing the price of the permission is the solution. The method of our solution being to blow up the Town and Country Planning Act. But at least we've got to the point where even the nef is noting that this is all a supply and demand thing. Make more land available to build houses upon and the land to build houses upon will be cheaper.

Things not to do: Renationalize the railways

Support for renationalizing the railways comes mostly from people too young to remember what it was like when the state owned and ran the railways. Those old enough remember overcrowded, dirty and outdated trains. They remember the lack of investment that meant the infrastructure was too antiquated to cope with higher speeds. Trains were slow and uncomfortable. The greatest drawback was that they were unreliable. It was difficult to plan meetings because people could not rely on the train being anywhere near on time, and large numbers of them were cancelled every day.

The staff were numerous but unhelpful. British Rail constituted a classic case of producer capture, with the trains running to serve the needs of the unions and their members rather than the general travelling public. The monopoly, combined with union militancy, gave them that power. Large numbers of railway staff at stations did not seem to do anything, and some analysis coined the term “overstaffed but under-manned” to describe the phenomenon.

Although people rightly complain about the present failings and inadequacies of the rail companies, the facts point to a considerable improvement in the years since privatization. Twice as many passenger journeys are made. The trains are faster, and more of them keep punctual times. The equipment is more modern, more comfortable and more reliable. Breakdowns are very much less common. Safety has improved, too.

Government was faced with a major problem at the time of privatization. It was the same problem faced by the other nationalized industries; insufficient public investment over the years had led to lack of maintenance and modernization. The rail network and the trains and their carriages needed massive investment to make them fit for a modern economy. The government continued and continues with a support subsidy to facilitate that.

The decision was made in the UK to have the travelling public pay a larger share of the costs of their journey than is the norm in much of continental Europe, where the taxpayer contributes more towards the cost of a train ticket. It was deemed unfair that people living in pleasant country areas should have a large share of their commute paid for by those who could not afford to enjoy that pleasure. Not surprisingly, this leads to complaints about ticket prices.

Renationlization would be a major step backward to all of the failings that a state-run railway entailed. But there are things that can bring improvement, some of which are already in process. Longer trains, and stations reconfigured to accommodate them would help deal with overcrowding, as would more frequent services.  The abolition of first class on some commuter routes would free up yet more space. Upgraded infrastructure and new technology can bring faster trains with shorter journey times. The diversity of different rail companies means that improvements achieved by some can be copied by others. And the need to win contracts keeps companies anxious to innovate and improve.

Black Friday is nothing to moan about

This morning our national media was filled with news that the American tradition of Black Friday has continued its spread to the UK. Variously people were concerned about crowds (Metro amusingly mocked the polite crowds with a wonderfully British headline), about the effect on our competitive retail sector, or how often deals were the same prices as earlier in the year. 

Yet what makes Black Friday interesting for the UK though, is not the immediate impact of price cuts (good for consumers) or the psychology of shoppers looking for bargains (shock). No, what’s interesting about Black Friday is how it shows the benefits of price discrimination.

No doubt your inbox this morning was, like mine, filled with offers from various retailers you’ve bought from before offering you unique deals designed to entice you to part with your cash in return for Christmas presents and goodies. If you got given a discount code, if you got personalised offers, if you received a loyalty bonus then you have been offered goods at a different price to what other people looking at these products will have been. You’ve been offered a discriminated price, a price different to what others will have been offered last week or will be offered next week. 

Why do shops do this? The British retail sector is famously competitive with a huge range of specialist and generalist stores in our high streets, in retail parks, and increasingly online. There are huge fixed costs in running stores (not least labour costs, global supply chains and logistics across the UK). Purchasing the distribution warehouses and stores, hiring and training staff, getting a brand known and thought positively about, all of these are high upfront costs that companies incur. 

In certain situations you might bemoan price discrimination. Certainly our politicians like to do so when talking about utilities. As Sam Dumitriu argued, the real benefit from price discrimination comes from the overall increase in output, and the lower average price that everyone pays. 

Think about a jumper produced by a firm like Zara.  The Galician retailer will have spent millions in research and development, in building one of the most advanced supply and distribution networks on the planet and have competitors across the UK offering similar products. The sunk cost is enormous getting to the point where you walk in and decide whether you want to buy a jumper from them or not. If you walked away they haven't earned anything and all that money invested into the stores gets them nothing and it doesn't take long for a high set of costs with falling sales to turn into bankruptcy. 

By charging higher amounts to people that are price insensitive throughout the year, and by getting large numbers of people that otherwise walk away during the sales, they can spread the fixed cost that firms are charged. That way they boost the overall level of sales and manage to turn what would be a loss into a small profit.

In other words, they're able to continue getting their clothes out across the country, and you're able to buy a wide range of clothes across the competitive market at a lower price than you otherwise would be. 

So here's to Black Friday and the beginning of a very consumer Christmas!

We have a useful solution to this business, err, horse puckey

Given the delicacy and refinement that we so pride ourselves upon here we might prefer to use horse puckey but there's no doubt that there's a certain directness and vibrancy to The Guardian's phrasing:

From inboxing to thought showers: how business bullshit took over

No one with any experience of modern capitalism would disagree with the underlying idea. We all know that by the time any organisation has a Human Resources department (rather than one bod in a corner just checking the legality of employment contracts) there's going to be floods, great tsunamis, of the latest cod nonsense flowing through the system. What we desire, of course, is some method of divining which is useful such and which isn't - something subject to Sturgeon's Law, 90% of everything is, well, that horse puckey.

Fortunately, we do, those markets in which modern capitalism is embedded. The proof being:

Although Kroning may have been killed off, Kronese has lived on. The indecipherable management-speak of which Charles Krone was an early proponent seems to have infected the entire world. These days, Krone’s gobbledygook seems relatively benign compared to much of the vacuous language circulating in the emails and meeting rooms of corporations, government agencies and NGOs.

Those agencies and NGOs are not subject to market pressures. The corporations are. Get too much up the bovine cloaca here and the business will go bankrupt. As C. Northcote Parkinson pointed out well over half a century ago the others will find that greater attention paid to such things brings an increase in budgets.

It might be true - sadly so - that there is no method of preventing the puckey takeover. That just means that we need to wipe out those organisations so affected - now all we've got to do is apply this rigorously, to those organisations which don't already face those market pressures which do that very job for us. 

Things not to do: Increase the top rate of income tax

Some people claim the rich are not paying their “fair share” of the tax total, and propose that the top rate of income tax should be raised to 50 percent, and some even say 60 percent. They often then proceed to say how the extra billions raised should be spent.

The problem is that there would be no extra billions. Less revenue would be raised at 50 or 60 percent than is currently raised by the top rate of 45 percent. In 1979 when a Conservative government took office, the top rate of income tax was 83 percent on wage income, with an additional 15 percent surcharge on money earned from investments, giving a top rate of 98 percent. Very few people paid 98 percent since it was hardly worth people earning money if they were only allowed to keep 2 pence for every pound earned.

The Conservative government made a series of income tax reductions. It cut the top rate on high earners to 60 percent and abolished the 15 percent investment income surcharge. More money was raised from the lower rates. It later cut the top rate to 40 percent with a standard rate of 25 percent. Again, more money was taken by the Treasury at the lower rates.

The reason is that economic activity became more worthwhile when people were allowed to keep more of what they made. Secondly, it became less worthwhile to make complex use of tax havens and to employ accountants to devise tax-sheltering schemes. At the lower rates it was simpler just to pay the tax. Thus more revenue was raised because the tax base increased and avoidance declined.

There was another significant effect. The proportion of the total paid by top earners increased. Where the top 10 percent had been paying 35 percent of the total, it went up after the tax cuts to 48 percent. The richest went from paying just over a third to just under a half of all income tax. In 1976 the top 1 percent paid 11 percent of the total; now they pay 29 percent of it. The top 10 percent of earners now pay 60 percent of all income tax, whereas the bottom 50 percent pay only 10 percent of the total.

More money would be raised by lowering the top rate to 40 percent, and more still at 35 percent; and the top earners would be paying a larger share of the total. It is politically difficult to be seen to be cutting tax rates for the rich, but the government could declare the target percentage of the total it wants the top 10 percent of earners to pay, and adjust rates accordingly to achieve it.

EU immigrants are indispensable

For many years, big welfare states tended to guard their borders, right to residency and especially access to welfare benefits very carefully out of fear of immigration creating a strain on the finances and many nations do in fact still guard these prerogatives today. There generally is a consensus today that if a nation has a liberal policy towards immigration then it also has to have more restrictive access to welfare benefits. However, EU changed this radically when they introduced free movement within its borders. This now meant that what had earlier been controlled by sovereign states now was controlled supranationally by the EU. Following this, workers moving within the Union had the exceptional right to access welfare benefits of other member states.

Nonetheless, this policy has for a long time been questioned due to political uncertainty regarding the sustainability of the welfare state in an open border community. Additionally, ever since the A8 countries (Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia, Slovenia) from the former East Bloc joined the EU, concerns with immigrants taking more out of the welfare state than they put in have been exacerbated ultimately peaking with the referendum on Brexit.

This concern ended up being one of the most pressing issues during the referendum campaign, even though EU immigrants have helped subsidize the welfare state as Sam has pointed out before. While it’s uncertain that this was the main driving force behind the outcome of the referendum, there’s no doubt that EU citizens right to participate (and receive welfare benefits) in the labour market created a polarised debate leading to an assumption that EU immigrants are “welfare tourists” who are here to free ride on the system, in spite of the fact that claiming benefits in the UK doesn’t come easy. In fact, in 2013 the EU Court of Justice supported a German jobcentre who declined two Romanian from getting basic social security on the ground that they travelled to Germany with the one goal of getting welfare benefits.

However, the debate is not exclusively prominent in the UK. In other countries, such as Denmark, similar assumptions are made. Due to the generous and universal benefits, many think of Denmark as a "welfare magnet" and to be incompatible with the free movement and open-border policy. Arguably, Denmark is even more of a welfare magnet than the UK with its high share of non-contributory benefits. In addition, more than 90 percent of immigrants from western countries that migrates to Denmark are members of an EEA country. With the addition of the Eastern European countries, the immigration from these countries have even been increasing since 2004 and since 2007 they’ve accounted for the biggest share of immigrants from the EEA, whereas in the UK they’ve been on par or beneath the level of immigration from the original member states.

Because of these characteristics, Denmark makes a good case for examining the effects of EU immigrants on the welfare state enabling us to generalize beyond Denmark and confirm/deny that countries with a residual/insurance based welfare state are attracting EU workers because of the appealing benefits, otherwise known as “welfare tourists”.

A paper published earlier this year examines some of the claims that is stated in the public debate. They manage to identify three core claims in all that they think should be examined empirically:

1. The EU free movement and cross-border welfare rules are more likely to pose a burden on more inclusive and generous welfare states.

2. EU immigrants from the new member states are more likely to be net burdens to the host welfare state than EU immigrants from the old member states, as their wage levels will be low, and they will contribute less to the public purse.

3. EU immigrants with short-term residence are more likely to be net burdens to the host welfare state than EU immigrants with longer term residence, as they may benefit from the system before they have earned their way into it.

The authors found that in the period examined the EU free movement and cross-border welfare rules did not cause a fiscal burden - quite the contrary actually. They conclude that EU citizens had a positive effect on the Danish welfare budget contributing with 15.54bn euros while expending 8.91bn euros resulting in a positive fiscal contribution of 6.63bn euros. Furthermore, EU immigrants coming from some of the newer member states also net contributed to the Danish welfare state, although they didn’t contribute as much as immigrants coming from the original member states. However, they weren’t as much of a strain on the expenditures as EU15 immigrants.

In the blog post I mentioned earlier that Sam wrote, he also examines, based on a paper written by LSE’s John Van Reenen, what effect immigrants have on natives wages. He finds that they have little to no effect overall on low skilled workers. As he argues:

This isn’t terribly surprising, even if we take a fairly simplistic supply and demand view of things. Immigrants supply labour, yes, but they also demand labour – they spend their incomes on groceries and other things, creating about as many jobs as they’ve taken. That’s a very crude way of putting it, but it might help us to understand why the empirics look so benign.

Finally, EU immigrants with short-term residence proved to be putting more into the system than they would take out albeit the numbers are significantly lower than immigrants staying long-term. A report from the Danish Ministry of Finance has confirmed this as well.

In addition to all this, employers understandably fear that a shortage of short-term workers will occur. The average satisfaction with current short-term workers has dropped as well, suggesting that the qualifications of these workers have diminished. However, the fears go beyond that. With the net immigration of EU citizens falling with 81,000 compared to 2016, something might suggest that if a proper deal with the EU securing the free movement of labour and current EU citizens rights to stay in the UK, similar to the deal that Norway or Switzerland have, doesn’t happen, the lack of workers from EU member states will result in an acute labour shortage, especially within the NHS where non-UK doctors have been an important remedy to meet that shortage. If, as the numbers suggest, UK becomes less attractive for EU workers, UK will suffer from even lower productivity as 5.5 percent or 35,740 smaller and medium-sized business directors are from the EU.

Therefore, a change in discourse among pundits is much needed in order to address some of the concerns that dominated the referendum campaign and still dominates the media today. Instead of using fear mongering rhetoric, we should aim to address these fears with sensible arguments and hopefully the UK will get out of the EU with similar possibilities for EU citizens as they have now. They after all help contribute on key areas which is indispensable, especially with the prospects of low productivity for the years to come.