The Office for National Statistics proves Hayek Right. Again

There are those who insist that we can plan something as complex and chaotic as an economy. If only all the bright people were stuck into offices they'd be able to make all do as they insist and the world would be a better place.

It doesn't seem to matter how often reality comes around to give them a smack in the mouth, the belief persists. One such slap coming from the Office for National Statistics: 

Britain’s trade deficit is almost £10bn smaller than previously thought as financial trading is a bigger boost to the economy than experts had realised.

A new system for counting goods traded in and out of the UK also meant the deficit came in smaller, improving the economic outlook.

The 2016 deficit in trade in goods and services was one-quarter smaller than had been understood, at £30.9bn, not the £40.7bn estimated earlier. Around £5bn of the improvement comes from financial trading.

The economy was also £5.6bn larger than previously estimated, the Office for National Statistics said, due to financial trading profits.

It's entirely true that in a floating currency system trade deficits don't matter at all. But then those who would plan economies tend also to think they should be determining exchange rates - where deficits do matter in a fixed exchange rate system. And now we find that this specific number is 25% out? 

As said, that feeds through into the size of GDP. Which in turn feeds through into productivity numbers - UK productivity is 0.3% higher as a result of this change. The financial system is significantly more important to the economy than we thought, perhaps as much as 7 or 8% larger in fact.

And people want to try to plan an economy when we've this little knowledge about what is happening, let alone what will happen when all those clever people act on such sketchy information?

Hayek was right, wasn't he? We've not actually the information to be able to do such planning. As he pointed out, and as has been confirmed is even true with all these computers around, we cannot have such knowledge either.

Sadly, this little slap will make as little difference to the dreamers as that haymaker of the 1989 revelations did. The insistence upon national planning is a religious, not rational, belief thus reality - however hard it punches - just ain't gonna make a difference.

Yes we CANZUK

We started this week with a piece from Matt Kilcoyne in City AM calling for governments in Canada, Australia, New Zealand and the United Kingdom to seriously consider the prospect of CANZUK at the beginning of the Commonwealth Heads of Government Meeting. 

Today Dr Pirie uses his latest Madsen Moment to call for CANZUK to get greater attention. It's popular. CANZUK International found in polls of 13,600 across the four states this year that 68% were in favour in the UK (up 4% on last year), 76% in Canada, 73% in Australia and 82% in New Zealand. And it's especially popular among the young – somewhat of an open door for politicians to push at. 

In this week's #MadsenMoment Dr Madsen Pirie calls for governments in Canada, Australia, New Zealand and the UK to hear how popular free movement between #CANZUK states will be with their citizens. #CHOGM2018 pic.twitter.com/WXbfDOL1Ke

— Adam Smith Institute (@ASI) April 17, 2018

Plucking the Taxpayer

Hypothecating taxes makes good politics but poor economics.  The public liked the idea of paying national insurance, when it actually did fund pensions, road fund tax, when it did fund roads, and heritage projects via the Lottery. The BBC licence fee is a form of hypothecated tax. The Times on April 12th reported that most of the public support paying more tax provided it goes to the NHS.  Hypothecation for popular causes is a fine example of plucking the goose to maximise the feathers while minimising the hissing.

Hypothecation prevents government from allocating funds to where the country most needs them.  Priorities will change even though that disrupts planning for the recipients.  But then hypothecated tax flows will vary just as income tax, VAT and any other form of tax does. 

The history of hypothecated taxes teaches us that the Treasury cheats.  The road fund tax, for example, was only used to fund roads until the government decided the hypothecated tax was too much or too little.  Then it was swept into the general pot and the Ministry of Transport had to compete with every other ministry.

The only way to keep the Treasury’s hands off hypothecated taxes is to make the NHS independent of government, i.e. a public corporation like the BBC or the Bank of England.  Jan Zeber and I have made a case, published by the Taxpayers Alliance, for that. Today’s NHS is unmanageable thanks to its size and constant meddling by its parent Department and the DHSC’s 19 quangos.  If the logic of hypothecation was carried through to independence, the DHSC could be immediately scrapped – a considerable saving in itself.  Would we miss it?  Almost certainly not. The DHSC was responsible for adult social care, and yet did nothing about it, for five years from 2012. The funding came from the Department responsible for Local Authorities. Then Downing Street noticed and added the SC to the DH.  It is hard to discern any difference since.

So hypothecation and independence for the NHS should go hand in hand.  That would not entirely prevent politicians trying to make capital out of whatever problems emerge but at least it would minimise their ability to worsen the situation.  We would still require a separate regulator to maintain quality standards (i.e. the Care Quality Commission) in the same way that the BBC enjoys the attention of OFCOM. 

The NHS needs a distant planning horizon, perhaps 10 years, to train nurses (five years) and doctors (10-12 years) and build facilities.  At the same time, 10 years is too long a financial commitment for any government.  The obvious compromise would be for the NHS to have a 10 year planning horizon with hypothecated taxes set for that period but a quinquennial strategic and financial review in case the situation goes awry in either direction.

The more difficult question is how a hypothecated tax should be collected. People have long looked for ways to integrate income tax and national insurance contributions to avoid having to make two separate and complex calculations.  Business would not welcome a third unless it was something really simple like a per capita tax.  After all, we all pay the same prices for what we buy and are equally entitled to NHS benefits, so why not pay equally for health insurance?   

The people reported by the Times as being keen to pay more to rescue the NHS might not like the bill.  Dividing the NHS England cost per capita would be £2,200 each for this year, rising steeply if NHS England’s demands are met.  Remember the Poll Tax.

UK National Insurance Contributions for 2016/7 totalled £124.93bn. It is expected to rise to £136.5bn in 2018/9. Since the income is treated in the same way as personal income tax, it should be scrapped in England and replaced by the “National Health and Care Contribution”  (NHCC) since it would need also to cover the integration of adult social services as is now widely seen to be essential.  The UK NIC total take would need to be reduced by about 16% to give a figure for England alone but that would be offset by removing the exemption for those above the state pension age.  If the elderly will continue to get medicines free at the till, at least they should contribute towards them through the tax system.

According to the Health and Social Care Information Centre, “in real terms [English] councils spent £15.9 billion on social service support for adults ten years ago [i.e. 2003-04]. This peaked at £18.2 billion in 2009-10 before falling to £17.2 billion in 2013-14.” Although some tweeking would be needed, the NIC and NHCC figures would not be wildly apart:

In other words, the two could be swapped over without much cost to the taxpayer or HM Treasury.  Income tax would then cover what NICs now do and the NHCC would cover health and adult care.

As noted above, the NHS needs a 10 year planning horizon but any government would need a five year accountability framework.  For comparison the much smaller and more stable BBC secured fixed annual (licence fee) funding for 7 years in 2010 and in 2016 it was agreed that it should rise in line with inflation for five years from 1 April 2017.

The trade, in essence, for NHS and care independence and its own hypothecated tax should be a five yearly forensic audit by the National Audit Office to establish the extent to which the new English Health and Care Corporation (EHCC) could improve the value for money it gives to patients, the cared for and taxpayers. 

Merging NICs into general taxation implies removing the National Insurance Fund (NIF) and all the bureaucracy that goes with it.  A quinquennial NAO forensic audit of the EHCC would take the place of the five yearly actuarial review of the NIF which seems something of a farce.  In the last (October 2017), accurate forecasts were required through to the 2080s but it does not really matter what the numbers say as the Treasury tops them up to the required level anyway. It is a matter of indifference to the taxpayer from which pocket the Chancellor pays benefits.

If, per contra, NHS England is not given independence, then hypothecation would make no long-term sense.  It might alleviate immediate political difficulties but it would not be long before some future Chancellor is mixing and matching the tax streams.

The strange worry over China devaluing the Yuan

People do, often enough, worry about some strange things. For example, that China might react to Trump's tariffs by reducing the value of the yuan:

Beijing's threat to fight fire with fire in its escalating trade spat with Washington had one crucial problem. 

After Donald Trump warned that the White House was lining up a further $100bn of tariffs on Chinese products, Beijing ran out of US imports to ramp up taxes on. 

Some $550bn of products emblazoned with the Made in China stamp flooded into the States last year. 

A mere $130bn made the journey across the Pacific to the Asian powerhouse. Beijing would have to go back to the drawing board. 

A currency war — the use of monetary policy to devalue a currency to gain an advantage in international trade by making exports cheaper, also known as competitive devaluation  — is one method for Beijing to even the odds in a trade skirmish between the world’s two largest economies.

Analysts believe that Beijing is mulling a devaluation of the Chinese yuan as a hidden weapon in its trade war arsenal. 

It's not a very hidden weapon given that the price of the yuan is posted in millions of places and updated by the minute or second. But the complaint is also rather to miss what happens.

A devaluation of the yuan is something which undoes some of the damage being caused by those tariffs. That's what's being complained about in a sense of course. But then undoing that damage does, well, it undoes that damage. China's products would be more expensive in the US, US domestic production will be more expensive, as a result of the tariffs. A fall in the value of the yuan makes both cheaper again to the benefit of the American consumer. 

We, we few, who are rational about trade like this.

But the misunderstanding here is deeper than that. To the extent that the tariffs alter China's external trade those same tariffs will lower the value of the yuan. That's just the way it all works. Just as it did with the £ and Brexit of course. That British exports might have to vault the EU tariff barriers led to a fall in sterling. That fall neatly, and not at all by coincidence, compensating for the price differences that would be caused by those tariffs. That's just how these things work.

Thus, if we assume that Trump's tariffs will have an effect upon China's trade then one of those effects is going to be that the yuan falls against the dollar. Yet it's a fall of the yuan against the dollar which is being complained about here.

Yes, the complaint is about what will happen because of the tariffs. Go figure, eh?   

Changing the debate on gang violence and drugs

Daniel Pryor, Head of Programmes at the Adam Smith Institute, took to the airwaves with TalkRadio on Saturday to explain that if we want to tackle gang violence, the best way is to legalize and regulate the drugs market. 

Listen below 👇

Sadly, this won't work in economics, no

A reasonable enough idea here but it's not, we're sorry to say, one that will actually work in economics. The point being that the weathermen - the people economists were put on this Earth to make look accurate - have improved their forecasts by being less specific about them. So, would this work in economics?

The opposite has happened. The ensemble approach has helped improve accuracy: Scientists can now predict weather as well over 4 days as they used to over one day. This has increased public confidence in forecasts, which now inherently include a range of possible outcomes rather than pushing false belief in a single outcome. Oddly, better knowledge has come about by emphasizing doubt and uncertainty at every step.

This can work in economics as well. The Bank of England, for example, has adopted the ensemble approach in its forecasts, always laying out a range of possibilities rather than just one prediction. 

This would work in one sense in that sure, the economy is chaotic, complex, and it's near impossible to produce a point answer to any question about it. So, produce a range and we'll do better .GDP next year will be within 10% of GDP this year, that's near certainly true for example.

In another and much more important sense this won't work. For it obliterates the possibility of using economics to do what so many people wish - manage society. It shouldn't come as a shock or a surprise that there are plenty of people out there who insist that if just their policy were enacted then this would be nirvana. Perhaps the latest being the Modern Monetary Theory people, who state that government should just print as much money as it likes, spend it then control inflation through taxes. 

If we now insist that actually, we cannot provide point answers to any questions about the economy, only a range, that rather destroys the ability to fine tune taxation to beat inflation, doesn't it? We're asking for operations at a level of detail we've just admitted we cannot even predict, let alone manage.

Which is why there will be so many against this rather sensible idea. For those insistent upon economic management are never going to want to admit that we don't actually know, and cannot, the outcomes of their management. Which is a bit of a barrier to implementing such management plans, isn't it? 

Mark Carney's quite right about the Engels Pause

Mark Carney worries, in a recent speech, about a repeat of the Engels Pause. The vast improvements in productivity from automation in the early days of the Industrial Revolution seemed not to feed through into wages for the workers. In fact, it wasn't until the 1840s that the standard measurements showed a decent enough rise in general wages.

If this were to repeat then there's the possibility of an increased, as then, interest in communism:

Mr Carney has said the growth of technology and expected automation of millions of blue and white collar jobs will result in a poor wage growth for those in work.

He said “Marx and Engels may again become relevant” if technology destroys jobs, decreases wages and increase the amount of inequality, as a new elite of highly skilled workers and the owners of high-tech machines receive the rewards.

One answer to this is that those wages started to rise properly once we'd abolished the Corn Laws that so favoured the rentiers. So, that's our current commitment to unilateral free trade justified then. On the very basic grounds that this is what raises the real wages of the workers, gaining access to the best and cheapest from around the world.

A deeper analysis gives us another parallel. We're not measuring real incomes properly now, as we didn't then either. Producing this very problem being complained about. As is so often true this comes from the very new technologies being talked about - what value do we place, in our income calculations, upon the ability to do these new things? 

What should be the value of Google, Facebook, the new digital services, be in our GDP calculations, those then feeding through into our income ones? We know, absolutely, that we're doing this wrong right now - WhatsApp appears as a reduction in productivity for example. No, really, 200 engineers providing telecoms services to a billion people turns up in GDP and other statistics as a decrease in productivity.

Back to Engels' time:

And there is another group who benefited mightily from North American slavery: consumers of machine-made cotton textiles, from peasants in Belgium able for the first time to buy a rug to London carters to Midwestern pioneers who found basic clothing the only cheap part of equipping a covered wagon.

As with slavery so too with that other part of the same economy, that revolution in cotton manufacture. The people who really benefited were those able to get cheap cotton clothing. Anyone who thinks this wasn't an increase in real income should try wearing woollen knickers for a few weeks.

Part - the only disagreement here being how much, some or all - of our low income growth today is just because of the errors in the manner we count such real income. As is true of how we count those historical incomes that make up the Engels Pause.

A useful thing for us to be doing now is to do the counting correctly so that we've not got that descent into the communism.

Isn't it great that the car fleet is getting older?

Our initial reaction - made elsewhere - to this news was, well, that's obvious, isn't it? 

The average age of a car on Britain’s roads is at its highest level since the turn of the millennium with the proportion of motorists behind the wheel of an old banger surging.  

UK cars and vans in 2017 had an average age of 8.1 years which is believed to be the first time that the average age has been above eight since at least 2000.  

We've just had a deep and bitter recession, people will have been running their cars a little longer, not replacing them at quite the usual speed. As is always true readers in aggregate know more than any individual writer so it wasn't long before it was pointed out what good news this is, it means that cars are better, they last longer these days.

And then a very good comment indeed from "isp" (Ian P to those in the know):

In fact given the energy required to produce a car it could be argued that car efficiency has improved by more than you see from the simple mpg stats.

An important point - it takes energy to produce a car. If cars are lasting longer then that energy requirement for fabrication is being amortised over more miles and or years. The energy requirement for any one mile of travel is thus reduced. And reduced in a manner that we don't count in our normal statistics.

So far just an interesting observation. But now think of the near mania for scrappage schemes to get older cars off the road so as to increase the efficiency of the fleet. None of the calculations of these do include the energy costs of building the new vehicles - and certainly not in the case of electric vehicles and the energy required to make large batteries.

Those car building energy requirements are such that we don't actually know how much the mpg of the fleet has to improve for us to be gaining a net energy saving and we most certainly don't know whether scrappage schemes actually achieve a net saving - or, they might be energy sinks.

All of which leads to a more usual and much more important point. Planning of the economy is impossible because it's just too complex. What should we be including in our costs and benefits of any action? As Hayek pointed out, we can only use the economy itself to make such calculations. Nothing else does actually take account of these second and third etc order effects.

Brace yourselves, here comes the disability pay gap

Following on from the varied lies we're being told about the gender pay gap (hint, it's actually about primary child care decisions and little else) we're going to get hit with the next demand, that we close the disability pay gap:

How can bosses get away with this? As Suzanne Moore points out, women’s unequal pay is justified in a myriad ways: from us not trying for competitive roles, to being “too caring”. Similarly far-fetched excuses are used when it comes to disabled people. Longstanding prejudice around disability – that we are pitiable, stupid or a burden – creates a climate that permits keeping disabled people in low-waged, junior roles. Even the chancellor, Philip Hammond, last year implied disabled workers were less productive, while the idea we should be paid less than non-disabled people is a persistently mainstream opinion (in 2014, the then welfare minister David Freud suggested disabled workers may be “worth” about £2 an hour ). The message is often, “Forget equal pay – if you’re disabled, you should be grateful for having a job at all.”

It depends upon the disability and the job of course. Freud was talking about, as an example, someone severely affected by Down's Syndrome. The harsh reality being that people are paid - closely enough and never perfectly - the value of their marginal production. The distinction between disabled and not is that if the productivity is equal then someone isn't disabled with reference to that particular task. And pay won't be different either.

However, disability is going to reduce the number of right shaped holes in the employment market that the peg of the worker can be inserted into. The blind aren't going to get jobs as deep sea divers nor pilots, we'd not recommend someone wheelchair bound applies to clean stairwells. 

That might well lead to differences in average wages. That rather comes with the very idea of disability itself, it does mean not being able to do certain things.

As to what we do about it, sure, this is unfair in that cosmic sense. Much to most disability comes from sheer happenstance and we tend not to like outcomes being determined by that. However, equalising the wages that must be paid isn't the solution to this at all. For we would thereby be insisting upon the same wages for lower productivity, something which just always does lead to no jobs rather than better pay for those affected.

The correct answer is that if we, as a society, wish to compensate for that happenstance then it's we, as a society, that has to do the compensating. Rather than trying to dump it upon employers and thereby increase the problem itself over the incomes of the disabled. This means we put our hands in our pockets to pay tax to be distributed to those disabled. As, actually, we do.

The lesson to take to heart here is that we cannot change prices in markets without ill effects. But we can indeed compensate for market prices if we wish to do so. As we so often do of course, everything from unemployment pay to Motability to a carer's allowance is a compensation in this sense. This is the way to do it rather than trying to change the functioning of the market itself.

Personal Health and Care Budgets

Despite their straitened circumstances, the NHS is never short of ways to extend their bureaucracy. Now it intends to increase the number of people with legal rights to having personal health and care budgets. It has been piloted since 2008 with an interim, inconclusive report in 2012. A final report is due soon but they are not waiting for that. A consultation is now running on expanding the “streams” of those legally entitled to personal health budgets from the current 23,000. Planned expenditure can be paid directly into their bank accounts if they wish. Plans can be either health only, funded by the NHS, or care only, funded by the Local Authority, or “integrated” and funded by both and also any other agencies that can be persuaded to give their time and money and participate.

The concept has merit. Patients and the cared-for have more understanding of the costs involved and the options. Patients and the cared-for like the sense of being in charge and having choices, illusory though that may be. Importantly planning seemed to reduce the time spent in hospitals.

On the other hand, the pilots showed no change in clinical measures, e.g. life expectancy, clinical symptoms and “EQ-5D” (health quality of life) for the “plan” group versus the no-plan control group.

The NHS now intend to expand this scheme to about 100,000 people with continuing/long-term health and/or social care needs. No doubt the NHS will have us all at it in due course. The 2012 evaluation did not take into account the meetings and paperwork involved in assessing individuals in the first place and then keeping the account books and updating the plans thereafter. 

Once assessed as having the right to a plan, if the individual wants one, the expected future health/care needs are planned for an appropriate period and costed. The range of items that can be purchased is wide. It includes aromatherapy, for example. To save the Clinical Commissioning Group/Local Authority having to deal with dribs and drabs of bills, funds can be transferred monthly to the carer’s bank account. As I have a rare but continuing condition that can only be mitigated by betting on horse races, I am putting in for a plan myself. The rules say that if the Clinical Commissioning Group or Local Authority consider the money has been misused, they are entitled to ask (sic) for that money back. But they have to continue to provide the care willy nilly.

The system seems to be fraught with opportunities for administrative error. And if you die with funds in your bank, whose money is it? 

For example, Local Authorities have long funded professional carers but not caring by the, often heroic, family members. The distinction is whether the carer cohabits with the cared-for or not. Not too difficult, you might think, for one’s partner to care for the neighbour and his partner to care for you, at least notionally. While the Local Authority is paying the wages, as is the case today, such naughtiness is minimal but with the cash all handed over to the individuals, it surely will. And how many people will be needed to police all this and put prices on everything the individual gets from the NHS and Local Authorities. Are medicines still to be free for the over 60s? Or should plans include the true costs so that proper comparisons can be made?

If someone with an Integrated Personal Budget moves house, does he or she keep unspent funds? Is a bridging loan provided to cover the gap before the new plan comes into place Perhaps it will become attractive to move a few streets from tight-fisted funders to more generous ones.

I may be underestimating the wisdom of the NHS and the Local Authority bosses who are putting all this together. They talk of the move to individual choice and individual rights but the reality is quite different. The paperwork is organized to fit us all into “streams”. Everyone inside a stream is deemed to be the same but different from everyone outside the stream. We are not being given individual independence but categorized.

My final concern is with handing out a new bunch of “legal rights”. Court cases will follow. Follow this logic and we will have legal rights to “Personal Life Budgets” which will require the government to provide each of us with the wherewithal to cope with life’s problems.

Far simpler would be to require more complex health and social care cases, defined by, say, four or more separate specialisms being involved, to appoint from their ranks the lead professional to ensure that a holistic view is taken. Meetings, where feasible, should include the patient/caree because that sense of being in control and having choices is valuable. Normally the leader should be the professional most involved. GPs are not keen on that idea as they would typically get the leadership role and have to add that to their already heavy loads. Some reward would be appropriate. Such a system would cost far less than personal budgets and no bureaucracy would be needed. 

The consultation on the NHS England website runs until 8th June. Please take part. You will soon get a sense of the quality of analysis behind it.