Oxfam don't have the monopoly on truth

Oxfam’s annual wealth inequality press release features a startling statistic. And no, it isn’t that the 85 richest people in the world could fit on a single double-decker bus. They claim that 2/3 of the world’s 2,043 billionaires got their wealth through cronyism, inheritance, and monopoly.
 
I won’t dispute the numbers for cronyism and inheritance. But, I was curious to see what they define as monopoly. After rummaging through their briefing paper I found a citation to a report called ‘Extreme Wealth is Not Merited’.
 
In the paper, they try to identify whether wealth is the result of inheritance, cronyism, technology, globalisation, or monopoly. They reckon that nearly 20% of billionaires owe their fortunes to monopoly. That seems high. Let’s see how they worked that out.
 
They make some bold claims. First, as part of their measurement they identify any IT firm benefitting from substantial network effects as monopolistic. As I argued before, this naïve ‘winner take all’ theory of network effects doesn’t fit the data. They assume that there is intense competition at first, but as soon as one major players emerges network effects create massive barriers to entry. The author argues that even if the initial phase of competition was furious, the rewards to the winner are unfair. Strangely, the author doesn’t even argue that this process is inefficient or harms consumers. Rather, they argue that the network externality benefits would exist even if another firm won out.
 
It’s a rather strange argument. And it should be seen in full:
 

“However, the externality exists independently. It is not a product of the business strategy, but is inherent to the nature of the product. Information technology billionaires thus capture and benefit from network externalities, but they do not create them. So the source of the extreme wealth, the externality, is not something that the billionaire contributes to society. Talent, effort, and risk-taking are certainly necessary to capture and benefit from the externality. But the wealth concentration that the externality creates is not proportional to, and indeed is largely independent from, that effort, talent, and risk-taking. It is the externality (e.g., the fact that everyone wants to use the same social networking website, whichever it is) that creates the extreme wealth, while the business strategy merely determines who gets it (e.g., a better-quality site is more likely to capture the externality, everything else equal). Network externalities create winner-takes-all markets where, by necessity of the nature of the product, one individual can become extremely rich while others, perhaps slightly less talented or simply less lucky, get nothing. Thanks in large part to network externalities, the founders of some leading information technology companies have accumulated wealth thousand or ten thousand times as high as that of their unsuccessful yet equally talented—or only marginally less talented—competitors (i.e., billions or tens of billions of dollars compared with millions, which is what most talented computer programmers can expect to earn in their lifetime)."

They also worry about vendor lock-in (bundling). Where firms with monopoly extend their dominant position in one market into another by bundling goods together. This would be illegal under competition law in the UK and US. Oxfam’s assumption is that antitrust enforcement is too weak. Perhaps, it is but extraordinary claims require extraordinary evidence.
 
However, the next step is crazy. Even if you suspect that there might be some monopoly power in IT (Facebook, Google, Microsoft), it’s a bold claim that all wealth generated in IT is the result of monopoly yet that’s exactly what they do.
 
To quote their report. Any billionaire whose “wealth [was] mainly acquired in the information technology industry (presumption of network externality, vendor lock-in, and public good market failures)” is classified as owing their wealth to monopoly.
 
They also classify billionaires whose “wealth [was] mainly acquired in the finance, health care, and legal industries or as CEO of a company that one has neither founded nor inherited (high presumption of the asymmetries of information market failure)” as owing their wealth to monopoly.
 
I’ll leave the reader to decide whether Oxfam’s 2/3 claim is fair.

 

Funding Health and Social Care

Responsibility for both defence policy and defence expenditure is evidently expecting too much of the MoD.  If that's true it might be better to transfer the purse strings to the Foreign and Commonwealth Office who know best where our forces are needed.  The government has already applied this thinking to adult social care. The Department of Health has been responsible for adult care policy these past seven years, and that role has been emphasised by adding it to the departmental title. Yet expenditure mainly comes from the Ministry of Housing, Communities and Local Government. As a result, almost all the government’s social care money gets to the front line. 

By contrast, only 71% (£99bn.) of the Department of Health budget is used to treat patients, together with £670M (0.5%) topping up local social care budgets to facilitate bed unblocking. The comparison with the MoD is uncanny: both would have plenty of money if they focussed it on the front line.

Primary and secondary care are funded by Clinical Commissioning Groups (CCGs) which were created by the 2012 Health and Social Care Act with the praiseworthy aim of reducing tiers of NHS management. They replaced Primary Care Trusts and Strategic Health Authorities.  The idea was to put GP practices in charge and to use market competition to reduce costs.  In the event, market forces have no impact on NHS hospitals: these juggernauts roll on as they, or their consultants, will.  And the 211 CCGs created mini-bureaucracies distracting GPs from their patients.  Nobody outside the system now likes CCGs but a credible alternative has yet to emerge.

The “key messages” of National Health Service Clinical Commissioners' (“the independent voice of clinical commissioning groups”) most recent self-justification was a set of semantic moves. From “In the future, there is unlikely to be a single model of clinical commissioning but all models should be locally driven and defined” through “Strategic commissioning provides an opportunity for CCGs to increasingly work together” to “Where a model of strategic commissioning develops, we expect national bodies to support this as a valuable part of the health system.” In other words, NHSE HQ is not going to change anything, just standardise everything. No specific improvements are proposed and the bottom-up, patient centred claims are abandoned. The patient loses but bureaucracy wins.

The system fails to recognise the root funding problem: treatment needs are not predictable. No hospital can know ahead of time what CCGs will commission nor can CCGs perfectly predict what will walk through their doors. CCGs are supposed to budget for a small surplus, which, if they make it, ultimately returns to NHSE. A commercial organisation, or even the BBC, has the flexibility to make savings, even late in the year, to offset over-runs elsewhere. But healthcare provision cannot be switched on and off like electricity.

The West Norfolk CCG has just provided a case study. Due to poor accounting, a £7.8M commitment was overlooked in 2016/7 and became a loss. The budgeting process for the following year, being unaware of the hole, made the same error so by January 2018 it appeared that they would be overspent by £10M for the current year.

The Chairman told his members they had to “face a star chamber of NHS executives. The Regional Director, Dr Paul Watson, was the lead inquisitor alongside three other NHSE big wigs. At the end of the meeting we were left in no doubt that unless we immediately start reducing expenditure then NHSE would not hesitate to disempower the Governing Body and current executives and send in managers under legal directions to turn things around. They would have little regard for the long term consequences of their actions, their prime imperative would be to simply save money.”

The main problem concerned commissioning primary care practices to provide “Local Enhanced Services” (LES), such as phlebotomy, electrocardiograms and minor surgery that would otherwise have to be provided (more expensively) by hospitals. This is part of the sensible strategy to push work back from secondary to primary care and thereby save taxpayers a great deal of money. Unfortunately the West Norfolk CCG (now departed) Finance Director had not budgeted for the work the surgeries were now contracted to do. The master plan of the NHSE executives, it turned out, was to save the money by simply not paying surgeries for the LES work they had done.

As the Eastern Daily Press and British Medical Journal reported, this caused uproar in West Norfolk. The Norfolk and Waveney Local Medical Committee and the Primary Care Contracting Committee (yes – how do GPs find the time to treat any patients when there are so many committees to attend?) were up in arms. Questions included whether NHSE had the authority to take over, still less unilaterally break contracts. If the NHSE executives suspended, as threatened, LES expenditure, the taxpayer would ultimately have to meet the higher patient costs elsewhere. 

Overall, CCGs are coping well but the West Norfolk CCG is far from alone. The National Audit Office found “an improved underspend of £154 million across clinical commissioning groups, yet 62 groups reported a cumulative deficit in 2016-17, up from 32 in 2015-16.” Of course CCGs and hospitals should not overspend their budgets but these accidents will happen from time to time and the system should allow for that. The simple solution would be to abolish CCGs, and the concept of “commissioning”, and fund hospitals and primary care practices directly, as is increasingly the case for schools with limited funds held back centrally by NHSE. Bearing in mind that most practicing GPs are independent and Foundation Trust hospitals are answerable to parliament, NHSE executives should see themselves as counsellors and promoters of best practice, rather than as line management.  

Legalise drugs, don't decriminalise them

Last week, I wrote for The Guardian on why advocates of drug law reform should opt for legalisation over decriminalisation. The article generated a great deal of debate and made a big splash on social media. You can read the full piece here. Here’s an extract:

Unlike decriminalisation, a legalised, regulated market would drive many street dealers out of existence. This is especially important for underage drug users because, unlike regulated shops and pharmacies, street dealers don’t ask for ID. They also tend to be unreliable sources of information on recommended dosage, and black market drugs are rarely pure. When I go to the pub, I know whether I’m getting beer or vodka; drug buyers on the street can only hope they’re getting what they’re paying for. The UK-based drug testing organisation The Loop has reported finding drugs laced with everything from concrete to crushed-up malaria tablets at music festivals.

The Adam Smith Institute has been advocating drug legalisation for years. Our most recent research paper on the subject, The Tide Effect, explores the case for cannabis legalisation. If you’re interested in learning more about debate between decriminalisation and legalisation, our former Executive Director Sam Bowman wrote this interesting piece evaluating these two approaches.

It’s also worth noting that there’s more to the drug policy debate than the question of prohibition, decriminalisation, or legalisation. On a local level, festival drug testing services like The Loop should be supported as part of an immediate harm reduction strategy. Our approach to regulating so-called ‘legal highs’ (or New Psychoactive Substances) is a failure. And it’s important to focus on the specifics of any legalisation proposal, right down to the optimal system of taxation and regulation for legal cannabis. In every area of the drug policy debate, we’ll continue to make the case for harm reduction and liberalism.

Should Carillion have paid more dividends or continued to build the conglomerate?

We have one of those lovely times when the received wisdom is doing a screaming u-turn:

Lifting the lid on Carillion’s strategic plans, it is clear that the company’s board mistook tactical nous for strategy. Not that there was much common sense in taking a building company and morphing it into a conglomerate that tries to meld together the management of prisons, hospitals and schools as if they were all the same.

We can - approximately and roughly speaking you understand - have two models of company finance. One is where a successful business, doing whatever, uses the profits being made to finance expansion into some unrelated area. Become a conglomerate in the jargon. We can also have a system whereby a stream of profits is returned to shareholders and they then invest in other companies, other management teams, which attempt at least to specialise in those other tasks.

The 1950s to 70s - roughly speaking again - were dominated by the conglomerate idea, subsequent decades by the sticking to the knitting and allowing the shareholders to allocate capital. One of the reasons for the change being that capital markets became much deeper and more liquid, meaning that shareholder allocation dropped in price in comparison to management allocation.

Oh well, shrug, horses for courses and all that. We'll find out which works best in time as those better attuned to current conditions outperform those who aren't. This is, after all, the point of having a market in such forms of organisation in the first place. We don't know which is better until we try it out.

But do note this screaming u-turn going on. We've got here the criticism of the conglomerate route. That critique coming from the very same source as the critique of the dividend paying method. How dare companies return profits to shareholders to allocate instead of management "investing," but also how dare management build a conglomerate? 

We have a preference for the pay it out and let the owners of the money, the shareholders, make the decisions. We do think capital markets are liquid enough for that to work. We're happy enough to argue the toss with those who prefer the conglomerate version. But we do still insist that cake cannot be had and eaten. Shouting that Carillion both paid too much in dividends and also used capital to expand into unrelated businesses to ill effect is really to gorge on that gateaux while still admiring it on the plate.

 

As we've been saying, migration explains the life expectancy puzzle

For a number of years now we've been trying to beat into the general consciousness something very important about life expectancy figures. No one, ever, measures the age at which people born in a particular place die. What is measured is the age at which people living in a place at the time of their death die. This is an important distinction.

Retirement towns (say, Bournemouth, just to use a cliche) have people who have survived to 65 to retire moving to them. This then raises the average age of death there by the leaving out of the figures of those who die before 65. Actual retirement communities - such as exist in parts of Florida say - will have vastly higher average ages at death than intensive care units for premature babies. Put that way it just seems obvious yet all too few manage to grasp the implication.

That implication being that migration matters and matters hugely. Anne Case and Angus Deaton famously found that Appalachian life expectancies were falling. That's also an area going through depopulation, near all of those who manage to go away to college don't return. Yes, those who go to college tend to have longer lifespans than those who don't. It could, of course, still be true that lifespans of all of that original population are falling but we must at least work out whether it is simply this migration of the likelier to be longer lived portion causing the observed effect.

At which point, something from ONS about the UK's regional disparities

The fact that, nationally, life expectancy is increasing makes the decrease in the most deprived parts of England and Wales all the crueller. This contrast had already caught my attention when I stumbled across the sentence mentioned at the start of this column. It’s to be found in the section of the ONS report headlined “London has experienced the most rapid increase in newborn life expectancy”. Discussing reasons, the report’s authors remark: “It is also possible that there is a selective migration of healthy individuals from deprived areas to London for employment or other economic reasons.”

What we do about some perceived or measured problem depends upon what is causing it. If it is simply this internal migration then what should, could, or what would we even want to do about it? 

Or as we might put it, we know that a modicum of exercise increases lifespan. What should we do if getting on your bike to look for work is what is producing these longer spans? 

Yet another ridiculous suggestion

The new technologies must pay for the old:

Google and Facebook should offer financial support to help fund a network of professional court reporters across the UK, the former Culture Secretary has suggested.

Tory MP, John Whittingdale, said the technology giants were making huge profits on the back of regional and national newspapers and so ought to consider giving something back by helping to fund local journalism.

He said one possibility was for them to contribute to the local democracy initiative launched last year, which sees the BBC invest £8 million of licence fee money in order to fund 150 local reporters.

We're really pretty sure that we didn't insist that the car companies should pay for the farriers they put out of work. Nor the computer makers for the typing pool, smartphones for the people who collected the money from phone boxes and so on.

In fact, it would have been ridiculous if we did. For the very point of a new technology is that it destroys the old way of doing things, freeing up labour and other economic assets to go and do something new. That new thing being done being the wealth we all gain from the new technology's adoption of course.

It is, of course, entirely possible - no, we don't believe it but we're always open to persuasion - that there is some social, national or even public interest in having a network of professional court reporters. If there is, if that case can be made, then tax is the correct source of funding. If, of course, the case can be made. Rather than trying to charge some private organisation something extra to support the technology it is wiping out.

Or, you know, people could read the online sources available

The NHS is a Zero Sum Game

In my book, “How to Win Every Argument”, I document many types of logical fallacy. One of these is the Zero Sum Game, in which resources are believed to be limited where they are not. In popular parlance some call this the “pizza pie” fallacy, stating that if a group were to receive a bigger slice, others must receive smaller ones. This only applies to cases involving a fixed size.

Many falsely suppose that at both national and international levels, if poorer people are to receive more, it must come from richer people. This has never been true. Poorer people become richer when wealth is created, not when it is redistributed. I cannot think of a single undeveloped country that has ever become rich on money transferred from richer ones; they have done it by trade and exchange, by selling goods.

One of the great tragedies of the NHS is that it has unnecessarily turned health into a Zero Sum Game. Because it has a limited budget, money spent on one treatment means that it cannot be spent on others. It therefore has to make life and death decisions based on what those running it perceive to be its priorities.

The money spent on intensive care for a severely premature baby cannot also be spent on giving several elderly people the hip operations they have been waiting for. The money spent on an exotic new drug that might give a cancer sufferer a few more months of life cannot also be used to provide kidney transplants to those who need them to survive.

The NHS as presently constituted must decide how its fixed budget is to be allocated between competing claims for treatment. This is why there will always be a demand from different parts of it for more funds for their specialist area, and why the BBC will always be able to highlight “underfunded” areas to expose as a “scandal.”

There are several solutions to this  problem, including that of turning the NHS into an insurance-based system in which people know what their level of cover is, and what treatments it will buy. The alternative is to continue with a system in which demand is infinite but funds are limited, and to have its rulers make decisions about people’s lives that gods might make, but humans should not.

Absurd - building more housing, by definition, increases the amount of affordable housing

Here is a wondrous example of how ridiculous the conversation about housing and affordability is:

Almost one in 10 new homes created in the last two years were converted from offices without having to go through the planning system, according to research by the Local Government Association (LGA).

This loophole of permitted development rights (PDR), which is legal, means that these new homes do not come with responsibilities to pay for affordable housing or invest in infrastructure such as roads, schools and health services.

The LGA, which represents councils across England and Wales, calculated that as a result it has led to the potential loss of 7,644 affordable homes over the last two years.

Housing completions are, roughly enough, 200,000 a year at present. So, we've gained 40,000 houses by the conversion process. As compared to not gained 8,000 from the tax upon new housing (that's what this affordable housing requirement is, a tax upon new housing). Now, neoliberals that we are, we think that's a net gain of 32,000 units. But then what do we know? 

We would also insist that every single new housing completion makes all housing just that fraction more affordable. This supply and demand stuff really does work.

So, the only way we can explain this is that it's a bureaucracy complaining that they didn't get the money to spend or manage, rather than it being any concern about the amount of housing available or its price.

We'd also take one more little point from this. If being free of the affordable housing tax leads to more housing units then why don't we just abolish the affordable housing tax and have lots more housing units? After all, we do know that if you tax something you get less of it......

 

Lost in migration

Last week, Trump allegedly questioned why US should accept more immigrants from Haiti, El Salvador and other ‘shithole countries’ in Africa, which honestly is a reasonable question. In all fairness, these countries are in one way or another not that desirable to live in. This, however, doesn’t mean the US or any other country shouldn’t accept immigrants coming from these countries just because they drew the shortest straw in the lottery of life. Most people in a similar position would try to amend their situation - and should be able to, especially considering the fact that half of the people in Haiti and El Salvador would, if possible, migrate to a different country and nearly 40 % of Africa.

These people suffer under corrupt governments who are suppressing growth and entrepreneurship - migration barriers cement these injustices into place and rob the people from the developing world of the opportunity for a better life. We should instead help them out of their dreadful situation and give them a chance to engage in free and voluntary trade in order for them to create better lives for themselves.

One of the things underlining this point is the wage difference. Because of the stifling governments and economies in the developing world, immigrants might see a twofold, a threefold or even as much as a thirtyfold rise in their wages, which emphasises the border discrimination going on and the huge missed potential. Some might object to this on the basis that, if we expand labour mobility from developing countries, there would be huge costs. But according to this paper, we could effectively substitute foreign aid programs with an increase in immigration and gain from it.

When the UK voted to leave the European Union, one of the reasons often stated was that the UK is able to create free trade agreements with other countries independently from the EU. But what featured more prominently in the Leave campaign was a focus on the return of control over immigration and, quite frankly, restrict it. Richard B. Freeman manages to sum it up in his paper:

The policy debate over globalization in the past decade has largely bypassed the international mobility of labor. Restrict trade and cries of protectionism resound. Suggest linking labor standards to trade and it’s protectionism in disguise. Limit capital flows and the International Monetary Fund is on your back. But restrict people flows? That’s just an accepted exercise of national sovereignty! During the last few decades, when most countries reduced barriers to trade of goods and services and liberalized financial capital markets, most also sought to limit immigration

For decades, economies around the world has become increasingly integrated and have accordingly liberalised trade. Yet one aspect of globalisation that hasn't received as much positive press as trade is immigration. The thing is, though, that maybe we should see free trade and migration as two sides of the same coin.

If we really want to prosper, free trade shouldn’t be the one and only priority. In fact, we could double the world GDP with less restrictive barriers on immigration policies contrary to the amount to be gained from the elimination of trade and capital barriers, which only constitutes a few percent of world GDP.

In addition, immigration might even foster trade between countries. In a study of the effect immigrants have on bilateral trade, the evidence shows that a 10% increase in immigration leads to a 1.5% increase in trade. What's true for immigration is also true for emigration. This is mainly due to immigrants lowering the transition cost through their knowledge about their home country which in the end has a positive effect on both export and imports. By contrast, immigrants preferences are only expected to boost imports through demand of goods from their home country.

So to answer Trump’s question: The immigrants from these countries are simply trying to do what those immigrants coming to America more than a century ago tried to as well. The fact that they are willing to chase that dream just goes to show that they are made of exactly the same stuff that the rest of America is built of. This is why the US should allow more immigrants from the so-called ‘shithole countries’. Instead of setting up new barriers for people trying to chase the American Dream, we should tear already existing ones down - life for everyone alike should be better with loads of opportunities to reach that goal. That is what the American Dream is about - opportunities, not barriers.

To finish off this piece, here’s a quote from a Republican hero, Ronald Reagan:

Many people are welcome in our house, but not the bigots.

The Habitable Homes Bill is really about social housing

We thought this was an interesting comment on a proposed bill:

This coming Friday, 19 January, a bill is to be debated in parliament that could hugely improve the lives of many people in England.

The Homes (Fitness for Human Habitation) Bill would give private and social tenants the ability to take landlords to court if their home is unsafe. Over a millionhomes are thought to pose a serious threat to the health or safety of the people living there. This classification, also known as a “category 1 hazard”, covers 795,000 private tenancies – one in six of the privately rented homes in the country.

Ooooh, private landlords! How terrible they are. Why not use the righteous anger of the people against them? 

But then we get:

Although there are fewer of them, social tenants with an unsafe home currently have even less recourse, particularly where the landlord and the council are one and the same, as became tragically apparent following the Grenfell Tower fire last June.

Ah. 

So, we've those dastards in the private sector, facing competition plus independent (of them at least) enforcement of standards. We've then got the governmental (and quasi-such) sector with a monopoly supplier, no independent enforcement and thus consumers have even fewer rights and methods of gaining them.

Thus we must change the law. 

OK, the basic idea seems fair enough to us. Yes, that governmental supply should indeed be subject to the same consumer protections as the market sector. In fact, shouldn't this be true of the entire economy?