If corporations have all this power then where the heck is it?

Peter Walker points out that there's a certain problem for those who would claim that corporations have some vast amount of market power which they use to lord it over the rest of us. If this were true then we wouldn't see corporate disasters:

Part of the idea here is that large corporations have power over markets and their consumers. When "corporate power" get mentioned I sure people think of companies like Microsoft, Google, Coca-Cola, Pepsi, and McDonald’s etc and the control these firms are said to have over their sectors of the economy. One aspect of this power is the control these corporations are claimed to have over their consumers, but if these "powerful" firms produce spectacular failures, then perhaps consumers are not as docile as some would suggest and we overestimate the extent of said corporate "power".

The latest example might be Microsoft's entirely dismal failure with Nokia. And it really has been an absurd failure as this rather hopeful email details:

Microsoft and Nokia created opportunity for companies in need of ICT professionals
1,000 ICT professionals available in Tampere, Finland, for any industry

Recent news about the Nokia and Microsoft layoffs are good news for those in need of experienced and international ICT professionals. The City of Tampere, Tampere Region Economic Development Agency Tredea and Invest in Finland (Finpro) address this unique opportunity with #Tampere4ICT campaign to attract foreign investments.

Microsoft Mobile and Nokia (Alcatel-Lucent) will release highly experienced technology professionals in the Tampere Region, Finland. There will soon be around 1,000 ICT professionals available, with experience of 10-20 years and with ability to build new, innovative solutions for any industry. Especially companies looking to set up product development, and willing to move fast, there is now a unique opportunity to acquire fully functioning product creation teams to develop advanced connected products.

They bought the company, played around with it for a couple of years and are now effectively closing the whole thing down. That simply wouldn't have happened to a corporation that was wielding great market power. And the explanation for why it did happen is simply that no more than some trivial fraction of us consumers were willing to use Windows for Phone. We beat one of the largest corporations on the planet and all their tens of billions of expenditure just by saying "Nah, think I'll have that one over there instead, ta very much." 

The notion of great corporate power over us consumers doesn't really stand up to close examination.

Write the law around what people already do not what some bureaucrat thinks they ought to be doing

We're very taken by this quote featured at Cafe Hayek:

How formal and informal rules interrelate substantially determines transaction costs in society.  I call this proposition the interaction thesis.  If formal rules are in harmony with informal rules, the incentives they create will tend to reinforce each other.  A harmonious interaction of formal and informal rules reduces the transaction costs of maintaining and protecting the rules of the social game and frees resources for the production of wealth.  When formal rules conflict with informal rules, however, their respective incentives will tend to raise the transaction costs of maintaining and enforcing the prevailing institutions and therefore to reduce the production of wealth in the community.

The specific point being made is about the transition away from Soviet stupidity in Eastern Europe. But we think it can be applied to that difference between the Common Law and the more centralised and bureaucratic Roman Law idea. Yes, sure, the difference has blurred over the centuries and the distinction is less important than it once was. And yet in these days of EU directives and regulations we think it still worth making the point.

The system as a whole will work very much better if the law is simply the codification of what people already largely do. Rather than the imposition of what some bureaucrat thinks people ought to do and against those already established patterns of behaviour.

And do note the importance of transactions costs here: they are purely deadweight costs, costs which diminish our collective wealth by their very existence. Reducing them is a prime aim of whatever legal and or institutional arrangements we make.

This is distinct from our general desire for there to be less law, less direction from the centre. Whatever direction there is needs to go with the grain of the extant society, not against it.

Why Keynesians are wrong

The most prominent theory in macroeconomics is New Keynesianism. One of the most striking and unique predictions that New Keynesianism makes is that when the economy is in a recession, everything gets flipped upside down. Specifically, when interest rates are at the zero lower bound and the economy is stuck in a liquidity trap, most of the things that would usually improve economic outcomes actually worsen them.

The NK model predicts that supply-side loosenings, like lifting employment regulations, cutting taxes or liberalising immigration laws, will actually make things worse in a recession, as will interventions that increase price flexibility. However, this prediction—familiar from Paul Krugman's NYT columns since 2007—seems to have been strongly challenged in a batch of recent papers.

The first is "Supply-Side Policies in the Depression: Evidence from France", by Jérémie Cohen-Setton, Joshua K. Hausman, and Johannes F. Wieland. It, as the title suggests, looks at data in from the great depression in France, one of the areas that suffered it from the longest, due to the obsessive desire of the Bank of France never to sever the currency's link with gold. The Keynesian model would predict that devaluation and leaving gold were the only game in town, but in fact the negative supply-side shocks that happened at the same time depressed activity, even in a deep slump.

The effects of supply-side policies in depressed economies are controversial. We shed light on this debate using evidence from France in the 1930s. In 1936, France departed from the gold standard and implemented mandatory wage increases and hours restrictions. Deflation ended but output stagnated. We present time-series and cross-sectional evidence that these supply-side policies, in particular the 40-hour law, contributed to French stagflation. These results are inconsistent both with the standard one-sector new Keynesian model and with a medium scale, multi-sector model calibrated to match our cross-sectional estimates. We conclude that the new Keynesian model is a poor guide to the effects of supply-side shocks in depressed economies.

The second is "Are Supply Shocks Contractionary at the ZLB? Evidence from Utilization-Adjusted TFP Data", by Julio Garín, Robert Lester, and Eric Sims. It looks at more extensive data on productivity. The Keynesian model predicts worse productivity improvements from supply shocks that occur in slumps but the data finds quite the opposite result.

The basic New Keynesian model predicts that positive supply shocks are less expansionary at the zero lower bound (ZLB) compared to periods of active monetary policy. We test this prediction empirically using Fernald's (2014) utilization-adjusted total factor productivity series, which we take as a measure of exogenous productivity. In contrast to the predictions of the model, positive productivity shocks are estimated to be more expansionary at the ZLB compared to normal times. However, in line with the predictions of the basic model, positive productivity shocks have a stronger negative effect on inflation at the ZLB.

The third, "What Was Bad for General Motors Was Bad for America: The Automobile Industry and the 1937/38 Recession" by Joshua K. Hausman, tackles the question less directly, finding that shocks that impacted the car industry, even if they weren't aggregate, demand-side shocks, nevertheless had large impacts on overall output and income.

I think the New Keynesian model is wrong about a lot of things. It seems that the impact of supply-side moves in a recession is yet another prediction it gets wrong.

This is a referendum on the EU, not the single market

Today three opinion polls - from YouGov, ICM and TNS - are all putting Leave in the lead. Those are on top of other very recent surveys suggesting a shift in Leave’s direction.

That has obvious significance and it is causing reverberations in the Remain camp.

Taking a step back for a moment to last week, on Tuesday we saw the Telegraph’s Ambrose Evans-Pritchard coming out in favour of the Flexcit plan by Dr Richard North, and my own ASI paper called “The Case for the EEA Option” that borrows from the North plan.

That article prompted leading Remain thinker Charles Grant of the Centre for European Reform to agree that using the EEA as a transition point was indeed a viable exit option - to my knowledge, the first Remainer to do so. Grant also agreed that parliamentary arithmetic very much favoured this option and, further, that top Vote Leave MPs would be able to support such a manoeuvre after a Leave vote.

Now this morning, the BBC’s James Landale has reported that Remain MPs are indeed saying that while they would have to deliver a Leave proposition after a Leave vote, they would not support leaving the single market (the European Economic Area), which is separate to the EU.

There are two ways to view this. Firstly that they are genuinely concerned about leaving the single market more than leaving the EU. That would make perfect sense as so many of their objections to leaving the EU are actually objections to leaving the single market. But secondly that they are making mischief for the Vote Leave campaign that has nailed its colours so firmly to the border control mast.

I suspect it is the first but with a helpful side-effect (to the Remain camp) of the second.

And of course the other paradoxical side-effect is that it derisks the economics of Leave and makes Leave more attractive to wavering voters.

Sure enough, Dominic Cummings for Vote Leave responded by suggesting that MPs were saying they would ignore a Leave result. Yet that is exactly what they are not saying. Rather that “Leave only means leaving EU membership”. The BBC report made it very clear:

One minister said: ‘This is not fantasy. This is a huge probability. The longer we move away from the referendum, the more the economic pressures will grow to keep some links with the single market.’

Another said: ‘We would accept the mandate of the people to leave the EU.’

Indeed they would. Because in the event of a Leave vote, the precise question on the referendum ballot will matter. A lot.

It's truly amazing what some people will complain about

We find ourselves rather gasping in amazement at this particular complaint:

The shale bonanza has also brought environmental headaches and raised concerns about whether the companies have disadvantaged poor people by drilling wells in low-income areas and exposing them to dust and traffic as well as air and water pollution.

In a letter last month, the Center for Coalfield Justice, the Pennsylvania chapter of the Sierra Club and the Clean Air Council asked the state’s Office of Environmental Justice to give the public more say in the permitting of wells. The groups believe the industry may be choosing drilling sites that disproportionately affect low-income and minority residents.

We positively want people to go and drill in low income areas.

Think it through for a moment. Fracking requires the use of land. Not so much the land that is actually being fracked, it's possible to drill for several miles underground. But there must be somewhere to put the rig itself, a pad for it. That is a cost to the process of course. We would thus expect people who are doing this efficiently to place such rigs and such pads where land is cheap in order to gain access to the desired underground reserves.

Low income people tend to live where land is cheap. Thus rigs will preferentially be where people are low, not high, income.

Imagine, for a moment, that we were to frack underneath London (no, we won't, the geology is entirely wrong). Would we place our rig in Mayfair in order to access that gas under central London? Or in Vauxhall? 

Quite. The complaint is that people are being sensible. Which really is a stunning thing to complain about, isn't it?

How excellent! Off you go then

Apparently that difficult problem of what we should do about the British economy has been cracked. All doubt resolved, we've now got a plan. To which our answer is great, how excellent!

What we need is “bulldozer money”: long-term investment in housing, infrastructure, energy, healthcare and transport. Investing in real assets creating real jobs, and delivering an economic multiplier effect over the long-term, where every £1 invested in infrastructure generates £3 of economic activity.  

One quibble, healthcare spending is not investment, that's current spending. But it is good to have a plan, isn't it?

 This £100bn could be used far more productively elsewhere. Instead, we should focus on the “G’s”. Green, clean, cheap energy from solar, wind and other renewables – technological advances in wind power, fusion, photovoltaic cells and batteries will drive costs relentlessly down. A Great Northern railway programme would ease travel and improve commerce from Liverpool to Manchester, Sheffield, Leeds and on to Newcastle. And Gatwick, where a new runway could be started by 2019.  

Super. So, what we'd like to have happen therefore is to get some of those people who know how to evaluate potential investments involved. Do such projects actually have a positive net present value, are they actually going to make us richer? That's the sort of thing that investment managers do for us. Which is useful because the man with the plan is an investment manager:

Nigel Wilson is the chief executive of Legal & General

Which is just absolutely great. He's got the skills and the network and the staff to undertake the task of what to invest in. He's also got a considerable pot of money to do it with. And we can be very sure that he's only actually going to invest in things that will make money, will add value, rather then splurge it around for political reasons.

That is, we, as in we collectively, don't need to do anything at all. All of the resources and incentives to make us all richer are already aligned in this one figure. If he can't find plans that will make money then he won't do them, if he can he will. 

So, Nigel, your plan, how excellent! Off you go then.

The oddity of closing the Tiger Temple

That we'd like the tiger to survive as a species is true: magnificent beings that they are. Which is why it's so odd that the authorities are closing down that Thai temple which breeds and keeps tigers:

Forty dead tiger cubs have been found in a freezer at a Thai Buddhist temple accused of wildlife trafficking and animal abuse.

Police and wildlife officials started an operation on Monday to remove all the living tigers at the Tiger Temple.

Pictures from journalists at the scene posted to social media showed the 40 cubs lined up on the floor.

The site in Kanchanaburi is a popular tourist attraction but has been closed to the public since the raid.

Finding newborn cubs on the site is pretty good evidence that they were not in fact wildlife trafficking, but wildlife creating. Which is, if saving the tiger is one of the things you desire to happen one of the things which you would thus hope someone would be doing.

Further, the way to save the tiger is to make having tigers more economically valuable to people than not having tigers. Thus creating potions from tigers is the way to save them.

Thus closing down a place which breeds tigers in order to make potions is simply most odd.

It's as if people haven't noted one of the salient facts about our world: there's a lot more cows around than nature alone would provide because we eat them, because they are economically valuable to us. Want more tigers? Make them more valuable.

Stop the facade, it's time to come clean about national insurance contributions

Tax Freedom Day, which measures the total tax burden compared to Brits' total incomes, falls on June 3rd this year. Everything we earn from every source for 153 days goes to the government and its programs; everything from today to the end of the year we spend ourselves. This is the latest it has been for fifteen years, and the evidence suggests a big government is an unwieldy one, and one that reduces growth. One way we could reduce it in a way that the average person will really feel is by raising the threshold you have to earn before you pay national insurance.

Britain used to have a contributory welfare system, driven by the recommendations in the Beveridge report, a surprise best-seller in 1942. People paid in, through national insurance, and gained eligibility for various social insurance and welfare benefits: pensions, the dole, sickness benefits, and so on. 

We still pay national insurance contributions, fooling many into believing that there is still a pot in which these pile up, ready to pay for our needs when we age, or lose our jobs. This is a façade; the pot no longer exists. The contributory system has effectively withered away, and we should cut some of the complexity out of our tax system by making that official.

People pay national insurance if they earn above £155 a week (equivalent to £8,060 a year). The fact that eligibility is determined by weekly pay, rather than annual salary, hearkens back to the system's 1940s origin. But these contributions have become tied only nominally to the receipt of benefits.

The last government did away with most of the complexities in the state pension to do with different levels of payment. That means it is all-but universally given at the same level now: £155.65 per week, and will in principle be given only to those with 35 years of national insurance contributions. But the current system gives national insurance credits not only to those earning above £155.65, but also those claiming jobseeker's allowance, employment and support allowance, child benefit for kids under 12, or carer's allowance, as well as those earning above £112, and so not paying.

The government, thankfully, is no longer trying to do the job of pension providers. It is trying to guarantee that no pensioners need to live in poverty. In so doing the contributory link has been broken on both payments; you don't need to pay to generate eligibility and the amount you pay does not affect the size of the payments you're eligible to. But because people are told they're contributing, some still believe they are saving up for their retirement, or for difficult spells, when they hand over NICs to the government.

We should acknowledge this disconnect by rolling national insurance contributions into the income tax, and starting them at the same threshold, so people know exactly how much they're paying. What's more, this should be our main strategy for tackling low pay, rather than the national living wage. The Adam Smith Institute’s recent paper 'Abolish the Poor' showed how simply lifting those working full time on the minimum wage out of income tax and NICs would bring them to the living wage income, without the risks of unemployment or an early shift to automation that come with wage price fixing.

The government has already made impressive steps on income tax, taking many low paid workers out of the levy entirely, but NICs have been left by the wayside. An NIC cut would boost work incentives and return money to the badly off at the same time, without risking unemployment.

The link between contributions and benefit receipt is gone in all but name. It was a system built for a time when a single earner was expected to support a family, and where the biggest problem was unemployment, not low wages. In practice, the welfare system has adjusted to the new reality, but the language and framework remain. We should recognise the situation as it is and cut away the final remnants of the old contributory link, rolling NICs into income tax and raising the NIC threshold so that we are taking less tax from the lowest earners. Doing so could give minimum wage workers a living wage, without the unemployment that risks. Beveridge's ideas may have been good for 1942, but they are not a good fit in 2016.

We rather disagree with this estimation of Bitcoin

We're rather techno-optimists around here: largely because we know a bit of economic history. 250 years back the average human was able to consume some $3 a day of current value. Today that's more like $30 and we in the rich countries are doing very much better than that too. All driven by technological advance: sure, that itself incentivised by markets, economic freedom, the price system and getting the institutions right. But it is technological advance which is the direct cause of our current wealth.

However, we're rather less optimistic about the prospects for Bitcoin. We're sure that the blockchain will be used to do some interesting things, although pretty certain that it will be a less clunky version of it which is. Bitcoin itself we don't think is going that far. And we're really pretty sure that it's not about to eviscerate banking:  

New technology such as artificial intelligence and blockchainwill utterly shake up the fundamental principles of banking, challenging the entire industry according to former Barclays chief Antony Jenkins.

He believes the innovation in finance could eliminate the need for maturity transformation – the process by which short-term deposits, such as current accounts and instant access savings, fund long-term loans including mortgages.

That is a fundamental principle of the industry as banks can offer a low interest rate to savers while charging more to borrowers, profiting from the gap between the two rates. Yet in 10 to 20 years’ time, he believes the need for banks to perform the function might no longer exist – already some investors are sidestepping banks by using websites to match borrowers and savers directly.

That there will be peer to peer lending we have no doubt about. But look at what the prediction really is: Bitcoin, or alt-currencies, or the blockchain, will wipe out fractional reserve banking. We will end up with a system instead of only 100% reserve banking. That's what no maturity transformation means. And we really do not think that is going to happen.

Simply because that maturity transformation is too damn useful. The desired maturity and liquidity of savings is rather lower than the desired such of borrowers. Thus, somewhere in the system we need maturity transformation. And as Brad Delong likes to point out if you borrow short and lend long then you are a bank: that being the definition of what banking is. Further, if you're not, you're not doing banking.

The blockchain might have all sorts of fun uses but it's not going to replace that basic desire we have for maturity transformation. Thus it's not going to replace banking.

Organic food is worse for the environment

Not that this should be much of a surprise to anyone but nice to see it confirmed again. Organic food is worse for the environment than conventionally farmed.

Organic food is not better than other produce in Britain because food standards are already so high, a leading expert in food sustainability has said.

Professor Louise Fresco, author of Hamburgers in Paradise, argues that European standards mean that pesticides are used so far before the harvest that no residues remain when they reach shoppers.

She also warns that organic farmers are wasting land by not using fertilisers which boost crops and says there is little evidence to show organic food is healthier.

99.9% of the pesticides in food are those naturally created by the plant itself: to avoid it being eaten by all the little beasties that proliferate out there in the countryside. 
Modern conventional farming applies so little in the way of extra pesticides at any point anywhere close to where they will still be in the food at the point of being eaten that it's not really measurable. 

Organic and pesticides is not really an issue.

It is true that there seem to be certain health benefits to organic milk: this is not a result of it being organic though. Rather, organic farmers sow clover into their grass as a fertiliser and it is the cows eating that which raises the Omega-3 content. Conventional farming which used clover in the same manner would achieve exactly the same result.

And then of course there is that pesky fact that organic yields are lower, meaning that more land must be used for any particular level of output. And that, of course, means less land available to be enjoyed by all those other little beasties out in said countryside.

Which leaves us with why Britons spend the thick end of £2 billion a year on such nonsense. People are entirely at liberty to spend their money exactly as they wish and so they should be. But we would suggest that here they're really falling prey to a particularly effective snow job by the Soil Association. The only people who really benefit here are the organic producers who get to charge higher prices by engendering that terribly smug feeling in their customers. By all means participate if you wish but do recognise what is going on.