Something Michelle Obama really ought to know

Michelle Obama is on a campaign to reduce obesity in the US. And given her background in the health care insurance industry there's something that she really ought to know which she apparently does not:

And this isn’t just about our children’s health; it’s about the health of our economy as well. We already spend an estimated $190 billion a year treating obesity-related conditions. Just think about what those numbers will look like in a decade or two if we don’t start solving this problem now.

The thing she ought to know being that the more grossly flaccid lardbuckets there are the lower the total health care bill will be. For we discussed back here the point that lifetime health care costs for smokers, boozers and those with rolls of sweaty flesh dripping from them are lower than those for the supposedly healthy who live longer lives.

The researchers found that from age 20 to 56, obese people racked up the most expensive health costs. But because both the smokers and the obese people died sooner than the healthy group, it cost less to treat them in the long run.......Ultimately, the thin and healthy group cost the most, about $417,000, from age 20 on. The cost of care for obese people was $371,000, and for smokers, about $326,000.

There are all sorts of reasons why we might be happy for government to encourage this healthy eating. People might really be too dim to understand the private costs of it all. It might give an unelected busybody something to do with her life. But given that obesity does not increase health care costs we cannot justify fighting obesity by claiming that doing so will bring health care costs down. For it simply ain't true.

The business of business is business

It used to be that Governors of the Bank of England expressed their views rarely and elliptically, in an effort not to disturb the markets, which hung on their every word and every nuance. The new Governor, Mark Carney, seems to be trying to achieve the same results by the opposite methods. He speaks so often, and so bluntly in his direct Canadian style, on so many different issues that the markets haven't the faintest idea which direction they ought to be going in.

The latest is particularly unusual for a Governor. Carney has entered the political debate on equality, citing "disturbing evidence" of declining social mobility in advanced economies, and urging "a basic social contract comprised of relative equality of outcomes; equality of opportunity' and fairness". Nowhere is the need to be fair and trusted more acute than in the financial markets, he said.

This is worrying. It is a fair point that if people do not regard their bankers – and other suppliers – as trustworthy, that is bad for business all round. The market system relies on fair dealing and trust. But quite what social outcome the market system does or should produce is a matter for politicians rather than central bankers. (Well actually, as Hayek shows us, the outcome should not really be a matter for politicians either, but it sure as eggs is not the right subject for central bankers to opine on.)

It is worrying to in that the Bank of England regulates the commercial banks, what message is it sending to them? The suggestion that banks and bankers have some kind of obligation to promote "relative equality of outcomes" seems at odds with the Bank's other instructions that they should strengthen their balance sheets and be prudent and businesslike in their operations. Banks, after all, cannot escape risks. So yes, they should lend wisely. Yes, they should borrow prudently. Yes, certainly, they should comply with the law. And they should adhere to ethical standards – keeping their word, not lying to customers or misleading them, being sensitive to the interests of clients and making sure that those interests prevail.

But is it the proper role of any business to promote any particular social objective? Professor Norman Barry, in his Adam Smith Institute paper of many years ago, Respectable Trade, pointed out that in a properly competitive market, firms would have no cash spare to spend on such agendas, if they had no direct effect on their business. In banking, though, the situation is even trickier, because of the world of risk in which they live. Should banks promote particular social object, regardless of the extra risk that involves? The risk of not borrowing quite so prudently nor lending quite so wisely? That, after all, is what got us into the mess of 2007-08. Coerced by their regulators, American banks started lending to homeowners who could not afford the loans. While in the UK the former building societies, spurred on by politicians for reasons of 'regional policy', got quickly out of their depth with some very bad borrowing.

The business of business is business, not civics. Civics is the business of politicians. And something that central bankers should probably steer well clear of.

This is a terrible idea for local authority pensions

It was Ben Bernanke who pointed out that the major use of eonomics is to shoot down 90% of the proposals that are made for public policy. This is one of those 90% times with this remarkably silly proposal for how local authority pension funds should be invested:

This makes no sense, according to Birmingham city councillor, John Clancy. He has just published a book, The Secret Wealth Garden, in which he calls for three major reforms of the current system. Firstly, he calls for management fees to be capped at an initial 0.02% of the fund's value. This, he says, would still give fund managers a tidy £43m in fees annually. Secondly, he says funds should be de-risked through an amendment to the Local Government Investment Regulations to require a shift away from equities (particularly overseas equiuties) together with a minimum holding in regional and local investment bonds. This, he says, could provide up to £20bn a year for investment in infrastructure and house building.

Capping fees, well, meh. However, the other two proposals are entirely nonsense.

The point and purpose of pensions savings is to diversify away from the risks that are inherent in having your income coming from only one or two places. Therefore you absolutely do not want to invest your pensions savings in the same economy that you inhabit. For example, unless you're getting a very good matching scheme from your employer investing your pensions savings in the shares of said employer is very much a thing not to do. The same will be true of the local authority pensions savings in the economy of that local area. Imagine that the area enters some horrible near terminal decline? There are, after all, areas of every country that are simply losing population, closing down as an economy. You simply don't want to have the pensions of those in that area reliant upon investments in said area.

So the local investment portion of this idea goes against the very grain of what we're trying to achieve with a pension, a diversification of risk. And who, no seriously, who, would advocate investment in bonds for the long term? When the price of money, the coupons on bonds, have been below the inflation rate for half a decade already? It's nonsense.

Tax Freedom Day has finally come!

Yippee! Wednesday 28 May is Tax Freedom Day. Groan! The average person in Britain has to work 147 days of the year solely to pay taxes. Only then do we start earning for ourselves.

This year Tax Freedom Day falls three days earlier than in 2013. But we still labour nearly five months solid just to meet the Treasury’s demands. Even then, the government borrows another £1 for every £5 it collects in tax – borrowing which future taxpayers will have to repay. Add that in and the total Cost of Government Day does not arrive until 26 June!

The deductions on your payslip show only a small part of your total tax burden. Your employer pays the bulk of your national insurance, and when you start spending your pay you will find yourself paying value added tax and various other levies on alcohol, tobacco, cars, fuel and much else.

A billion here, a billion there all adds up. The Treasury hates Tax Freedom Day precisely because it shows the bottom line so clearly. They try to conceal the take by cooking up stealth taxes or by making the tax rules so complex that nobody can work out what they are really paying. And that has made the UK’s tax code one of the longest and clumsiest in the world.

But we should be told what we are paying. Only then can we see whether we are getting good value for money from our government apparatus. (Do you have to ask, though? That apparatus has grown in size by about a half since Gordon Brown became Chancellor in 1997. Are we really getting half as much benefit again?)

High spending and high taxes stifle economic growth. There is even a graph which economists use to illustrate that point, called the Rahn Curve. A bit of public expenditure seems to help growth – basic infrastructure, policing, defencd and justice have a cost. But when government spending tips over 40% of GDP, growth tends to slow. And we are well past that tipping point.

The message of Tax Freedom Day is simple. We are paying much more tax than we imagine. The lesson for politicians and tax authorities is to accept that, and to reduce and simplify Britain’s taxes.

The history of tax freedom day

Fifty years ago, Tax Freedom Day fell over a month earlier (23 April) than it does now. When England won the World Cup in 1966, it was still only 2 May. Then in the late 1960s, under Harold Wilson's Labour administration, the date moved much later, ending up at 26 May in 1970. The incoming Conservative government of Edward Heath government managed to bring it a little earlier, but before long it moved later again, hitting 2 June in 1975.

Over the next decade, Tax Freedom Day generally moved later, reaching a peak of 12 June in 1983 – reflecting Margaret Thatcher's desperate efforts to balance the government's books, even during a recession. During the rest of her term of office, she brought Tax Freedom Day earlier and earlier in May.

In the late 1990s, when Gordon Brown's expansionary agenda started to bite, Tax Freedom Day moved back into June again. It could have been a lot later, but Brown's massive borrowing enabled him to continue spending without raising the apparent tax burden still further.

Despite the financial crisis and a change of government, the date has remained stuck at the end of May for most of the last twelve years.

The big changes

1973-1974: The massive jump of 16 days was due to the sudden and very high inflation that resulted from the 'Barber Boom'. This pushed many earners into higher tax brackets (fiscal drag), and National Insurance receipts rose as nominal incomes rose too.

1979-81: The even bigger 20-day jump reflects the 1979 'austerity' budget which increased VAT (to 15%) and other taxes. Recession also reduced earnings, leaving the tax burden a higher proportion of the national income. A rising pound slowed export earnings, while another tough Budget increased tax revenues from income and wealth.

1997-2001: Most of this 9-day jump is down to Gordon Brown's first Budget in 1997, which introduced a windfall tax on utilities, changes in advance corporation tax, fuel duty rises, and the end of mortgage interest relief, producing a massive rise in tax revenues.

Happy Tax Freedom Day!

• Tax Freedom day falls three days earlier than it did in 2013; George Osborne deserves some credit, but…
• UK residents work 148 days of the year solely to pay taxes; that is every day from January 1 to May 28.
• Cost of government day is 26th June, six days earlier than in 2013, illustrating that the government is making small efforts to stop borrowing from future tax income.

This year's Tax Freedom Day, the day when Britons stop working for the government and start working for themselves, falls on 28th May, according to Adam Smith Institute calculations.

This means that Britons work 148 days of the year solely to pay their taxes (including direct taxes like income tax and national insurance, and indirect taxes like VAT and corporation tax). This is three days earlier than 2013's Tax Freedom Day, which is not statistically significant.

Tax Freedom Day is designed to illustrate to the public what real level of tax is, which the lengthy, complex nature of Britain’s tax code can often obscure. The UK's Tax Freedom Day is more than a month later than the United States', where citizens start earning for themselves on April 21st.

Cost of Government Day falls on June 26th, six days earlier than it fell in 2013. While this suggests slight improvement from last year, the government continues to drive up the national debt for almost another month after Tax Freedom Day by spending billions of pounds worth of future taxed income.

The ASI calculates Tax Freedom Day by measuring local taxes, direct and indirect national taxes, and national insurance contributions as a proportion of the UK’s national income (41.09% per cent in 2014), mapping that proportion onto the days of the year.

Director of the Adam Smith Institute, Dr Eamonn Butler, says:

“Tax Freedom Day comes three days earlier this year, but it is still outrageous that the average person in Britain has to work nearly five months of every year solely to pay taxes. Are we really getting five months' worth of value from our bloated government sector? Does it really need to do all the things it has taken upon itself, at our expense?

“In this World Cup year, it is salutary to remember that when England collected the trophy in 1966, Tax Freedom Day fell more than a month earlier – and even then, people complained about the burden. Since then, the burden has edged up decade by decade. But high taxes stifle economic growth. And the higher that taxes are, the more people will try to avoid or evade them.

“The Treasury hates Tax Freedom Day because it expresses the real tax burden so starkly. Officials and ministers would much rather rely on stealth taxes and Byzantine complexity in order to conceal the true size of out tax bills. But they won't get away with it – the public has a right to know how much we are being forced to pay in order to support the government.”

Steve Baker, Conservative MP for Wycombe and a member of the Treasury Select Committee adds:

“As an MP, I see how the services provided collectively through the state so often fall short of people’s needs and expectations so it is a shocking fact that Tax Freedom Day falls at the end of May. Even more appalling is that Cost of Government Day falls in late June. The Adam Smith Institute has done a great service by so clearly illustrating the cost of government, the burden of taxation and the scandalous gap between the two. Politicians have a great deal of explaining to do.”

David Ruffley, Conservative MP for Bury St Edmunds, adds:

“Tax Freedom Day is not just an economic argument, it is a moral one. The stubbornly high UK national debt is not just a drag on growth, it is also an unconscionable burden on future generations. To solve this problem we need to do much more to cut the size of the state. This must be accompanied by reductions in personal and corporate tax to unleash the spirit of enterprise that drives economic growth and higher living standards.”

The ASI in the news

Remarkably we have some reasonable economics in The Guardian:

"The contract negotiation they are having is about who gets the profit split on ebooks," said economist and Adam Smith Institute fellow Tim Worstall. "The correct answer emerges from our behaviour as consumers. We don't know what the consumers are valuing most – the distribution system Amazon supplies them with or the new JK Rowling that Hachette publishes. If we value JK Rowling more, then Hachette should win."

The point being that there's no metric by which we can decide what the profit split between a distributor, like Amazon, and a publisher, like Hachette, should be. There's simply no theory which provides us with a guide as to who should gain the lion's, or any other, share of the moolah. It all depends upon what we, the consumers, desire the most. If it's what the publishers provide then they should get that cash. If however most books are very close substitutes for eah other and we value the distribution system more then Amazon should get the folding stuff. And the only method we have of working out which is which is to observe what we all actually do. Will we go around Amazon in order to purchase Hachette products or will we not worry about JK Rowling and read some other Kindle book?

That is, the correct outcome in theory can only be derived from observation of market behaviour. There's simply no other way of doing it other than to watch it emerge.

Is the gender pay gap done to women or by women?

We would really like to know the answer to this question: is the gender pay gap something that is done to women by an uncaring patriarchy or is it something done by women? That is, are we imposing something upon women or is that undoubted pay gap a result of female choices? Voluntary Exchange has made a very clever catch here (and managed the almost unbelievable, found something useful in the writings of Beatrix Campbell) to aid us in answering the question:

Let me make sure I get this right. When women have less freedom to choose their jobs, earnings were equal, but when there is a policy shift that allows women more freedom to choose their jobs their relative earnings fall. Folks … this is prima facie evidence that the gender gap in earnings is caused by women’s choices and not by social restrictions.

We have, as all will recall, been shouting here for some years now that there isn't actually a gender pay gap at all. There's a motherhood pay gap instead. And as this example shows it's about the choices that women make over children and child care that create it. This must be so: if an increase in economic freedom leads to an increase in the pay gap then it must be the choices that people are making with that new found freedom that is causing said gap.

The pay gap is emergent from the choices of women. QED.

Leaving the EU is an opportunity for a better relationship, openness and choice

Recent European Union debate has misrepresented the case for exit. Those advocating the status quo depict exit as closing Britain off, reducing our influence in Europe, limiting our trade and endangering our economy. Similarly, too many see euroscepticsm as inextricably linked to UKIP, putting off many moderates. Instead, leaving the EU is an opportunity for a new relationship, openness and choice.

A better relationship

As part of a British exit from the EU, we would negotiate a new relationship. Norway, Switzerland, Iceland, and Lichtenstein sit outside the European Union but are members of the European Free Trade Area. This allows them to trade freely with members of the EU. These four EFTA states are richer and freer than the average EU state. Over the last decade, they have enjoyed higher employment, lower inflation, plentiful trade with the world, more EU trade per head, healthier budget positions and relatively robust economic growth. The only jobs that need disappear are those of our MEPs, and the supporting EU bureaucracy targeted at Britain.

Openness to trade

Outside the EU, we could still join the block in trade negotiations. We could also pursue our own free trade deals (potentially with EFTA members) to deepen our ties with the Commonwealth, America, China, and all our favourite country groupings (from the BRICs to the Asian tigers and the Next Eleven). We could even move towards a policy of unilateral free trade.

Choice

Outside the EU, we would  be free to determine our own policies and regulations. Much of the European Parliamentary election debate was dominated by immigration. You don’t need to agree with UKIPs proposals to believe that policy is better set by our Parliament, and our voters, rather than imposed from abroad. we would be free from silly laws imposed by Brussels, ranging from the needless bureaucracy of the “bendy banana law”, to proposals for an actively harmful financial transaction tax.

The exact proportion of law that comes from Europe is a matter of debate. It depends how you measure laws, and calculations rarely account for their impact. Regardless, even if the EU share is only around 15%, this is a loss of our fundamental sovereignty and equates to a vast body of regulations costing us hundreds of billions. In just four years, 3,580 new laws have been passed affecting British business. This equates to over 12 million words, which would take the average British business person over 92 days to read.

Do not allow the case for leaving the EU to be misrepresented.  It is an opportunity for a better relationship, greater openness and choice over Britain’s own affairs and future.

Where next for capitalism?

Writing for the BBC today, Madsen outlines his ideas about what capitalism should do to renew itself:

What capitalism should now do is to free itself from these rent-seeking perversions and spread its benefits as widely as possible.

It should act against anti-competitive practices to give people instead the power of free choices between competing goods and services. It should spread ownership of capital and investment as widely as possible through such things as personal pensions and individual savings accounts.

Read the whole thing.