Review: The Captured Economy

The Captured Economy: How the powerful enrich themselves, slow down growth, and increase inequality by Brink Lindsey and Steven M. Teles

There is a tendency on the right to confuse a defence of the status quo with a defence of free market capitalism. Left-wing concerns about a rising share of the national income flowing to the top 1% are typically dismissed. “Equality of opportunity not equality of outcome” is the canned response. The problem is that today’s distribution of wealth is not the sole result of a fair market process, rather regulations restricting competition and construction have redistributed wealth upwards.

In The Captured Economy Brink Lindsey and Steven Teles, scholars at the Niskanen Center, show how the American political system has enabled rent-seeking elites to stifle competition through regulation and subsidy. The traditional trade-off between greater equality and slower growth has broken down. Regressive regulations not only enrich the politically connected, they also contribute to wage stagnation and eliminate economic opportunities for the marginalised.

Often regressive regulations have seemingly reasonable justifications. Intellectual property incentivises creative endeavours. Occupational licensing protects consumers from quacks. Subsidies for mortgage interest promote home ownership. Green belts stop urban sprawl. But in each case, regressive regulations have been expanded in size and scope by politicians ill-equipped to resist the pleading of special interests.

There is no better example of upward redistribution than planning. Lindsey and Teles document how restrictive zoning laws have raised house prices by preventing the construction of new homes where they’re most desirable. As low-income workers spend more of their pay packets on rent, well-off homeowners benefit from ever rising house prices. Thomas Piketty found fame highlighting a dramatic increase in wealth inequality yet rather than being a natural result of market forces, Northwestern University’s Matthew Rognlie found that the rise was driven almost entirely by housing.

Not only do high housing costs eat into wages, they also create barriers to mobility. In today’s information economy workers are most productive when they’re packed together in big cities. The average worker in London can expect to earn £250 a week more than a worker in the North-East. In the past such regional inequalities would lead workers to ‘get on their bike’, but rents are so high that workers in London only end up marginally better off. Zoning locks workers out from where they are most productive: economists Enrico Moretti and Chang-Tai Hsieh reckon this effect reduced aggregate GDP by 13.5% in the US. The situation is almost certainly worse in the UK, where planning restrictions are even stricter.

The Captured Economy is not a laundry list of policy recommendations. In most cases the necessary reforms are clear. The problem is that rent-seeking elites will fight them and that unless you rent-proof politics, they will win. There is a mismatch of incentives. Take occupational licensing: you need a licence to work as a florist in Alabama. Florists earn more when they are insulated from competition, but consumers pay the price and would-be florists are stuck in worse jobs. Alabama’s florists have a massive incentive to campaign for stricter restrictions, but consumers will only gain marginally from cheaper flower arrangements. As a result, such laws remain unreformed.

Rent seeking will need to be tackled from multiple angles. We will need to end the kludgeocracy that prefers off-balance sheet regulatory solutions to transparent cash payments (see Help to Buy). We should move decision-making to more favourable terrain – city mayors have less of an incentive than local planning committees to reject new development.

Lindsey and Teles’ hope for a liberaltarian movement uniting free-marketeers and social democrats seems unlikely in the UK where Corbyn’s Labour rules out the hope of any pro-market consensus. But The Captured Economy is necessary reading for the Conservatives. Recent attempts at Tory renewal implicitly concede Corbyn is right that free market capitalism isn’t working, proposing toned down versions of Corbynism. To counter Corbyn’s anti-capitalism, the Tories need to tackle the regulations that redistribute upwards. It won’t be easy, but it is necessary.

Polly Toynbee confuses accounting and economics

That councils are facing budget pressures is entirely true. Polly Toynbee doesn't quite tell us why though:

The shires do claim, with some justification, that their finances are more inflexible, paying for care for children and the elderly, with no housing income to balance their budgets.

We should not let people forget that the widely cheered announcement of a national minimum wage - largely binding upon those who provide such care - was not matched by an increase in grants to pay for that pay rise. However, Polly's error, rather than omission, is here:

Let councils borrow unlimited capital to invest in housing, which yields profits. 

That is to confuse accounting and economics, a terrible sin. Council housing makes an economic loss, not profit. For unless we consider opportunity costs we are not doing economics at all. 

Council rents are lower than market rents, that's rather the point. Said council housing could be let at market rent - we know this very well from the existence of subletting. That difference between what is charged and what could be is the loss.

Thus Polly's call is that we should be making ourselves poorer, increasing the societal loss, by having more council housing. Really, not a good economic idea at all. 

The delusions of Oxfam

Buried in Oxfam's latest report about how disastrously unequal the world is we've got an assumption which is so breathtakingly foolish as to kill off any belief in the sense or sensibility of the organisation's mindset. They're trying to insist that the minimum wage in a place should be very much higher than GDP per capita in that same place. Something which simply cannot be done.

Oxfam has shown that minimum wages in countries like Morocco, Kenya, Indonesia and Vietnam are not enough for people to escape poverty.246 The Asia Floor Wage Alliance has found that legal minimum wages in the garment sectors in various Asian countries fall far short of providing a living wage (see Figure 8).

That's on page 39 of that report, figure 8 is on page 40. An introduction to the report is here.

The specific part that we know about from personal experience is the garment trade in Bangladesh. This produces some 80% of exports, is the major reason for the country's growth and employs some 4 million people. The minimum wage there is, close enough, 5,000 taka a month, or £50.

That's the minimum wage in the garment factories, not for the economy as a whole. That, the more general one, is whatever can be scraped together by doing whatever, a rather lower sum. That garment trade minimum is also straight in off the fields, no training, no experience, before any benefits (which do indeed exist) and before overtime or anything else.

Yes, a low sum and most assuredly we'd all like it to be much higher. But Oxfam's claim is that this should be a living wage of more like £250 a month (perhaps $250). Something which simply cannot happen.

GDP per capita in Bangladesh is some $1,500 a year or so. We cannot have a minimum wage twice that. This would be the same claim as insisting that the UK minimum wage should be $80,000 a year (say, £60,000). Worse, that this should only apply in one industry.

Imagine the dislocation if, to make up a British comparison, the minimum wage in sandwich making was £60k, all other wages staying as they are today? This would do what to the supply of doctors (maybe not so much) nurses and teachers (quite a lot) and so on? 

It's a demand based upon the most aggressively stupid misunderstanding of what ails Bangladesh, isn't it? The actual problem being that the place is too poor to be providing the incomes we'd all be delighted for everyone there to enjoy.

You know, that poverty which is being alleviated by this very neoliberal globalisation, that growth of the garment trade, which has seen the place growing at 6% and more for a couple of decades now.

Bangladesh's problem is not global inequality, the thing Oxfam is whining about, it's Bangladesh's poverty. That the recipients of hundreds of millions of our tax money manage to get this so wrong seriously calls into doubt Oxfam's right to anything more than a contemptuous sneer. The cure for poverty is economic growth, the very thing which has reduced that global absolute poverty from 40% of all humans to under 10% in just these past three decades of that very neoliberal globalisation.

This is just the one example from that report, we could pick out many more. Sorry folks, but Oxfam is deluded here.

Mirror takes over Express - some people will be very disappointed

It's a standard part of the British political discourse that media ownership is too concentrated. This is codespeak for "don't let Murdoch buy any more." There is always an amusement that the concerns of concentration never include the BBC's share.

The underlying intuition here being that newspapers, TV stations and so on direct the opinions of their consumers. Thus if there's some horrible foreigner, with right wing opinions even, then he shouldn't be allowed to teach people to be horribly, foreign influenced, right wing. We can guess which sector of the political compass such complaints come from.

At which point Trinity Mirror takes over the Express newspapers. This should cause great rejoicing in such quarters. Ownership of avowedly populist and rightie papers move over to the people who publish the great left wing tabloid of the country. Huzzah! Victory and all that. The people will be guided to GoodThink!

Except it doesn't work that way:

 In comments to BBC Radio 4's Today programme, Mr Fox insisted that "the Daily Express is not going to become left wing, the Daily Mirror is not going to become right wing".

Media outlets do not create the prejudices of their consumers, they chase them. Fox News, for example, does not laud guns and God because it, or its owners, desire to so laud. Rather, they've spotted that many millions of Americans will watch advertisements inserted into news shows which laud God and guns*

Which rather puts the kibosh on the argument about the views of which proprietors should be allowed to own media outlets, doesn't it?

This should not be a surprise, however much it is to those who just don't grasp the basics of the system. Capitalists in general aren't designing society, they're chasing it. Profits come from giving people what they already want, after all. It's the things we don't want that have to be subsidised....

*We might not be describing the channel's output all that subtly here..

Something fishy in this gender pay claim against Tesco

Earlier this week I ended up on BBC Radio Scotland (starting at 10:22) talking about the news that a £4bn claim had been issued against Tesco by its shopfloor workers because they had been being paid less than those in the company’s distribution warehouses. The contention of the legal case is that, with shopfloor workers (on average were more likely to be women than men) being paid a modal amount of £8 an hour, and warehouse workers (on average more likely to be men than women) being paid up to £11.50, that there was a case of discrimination by the company against women in favour of men.

Forget the fact that the claimants used a modal amount for one group and a top rate for the other, the question remains, is there a case of discrimination here? It is not obvious that there is.

Imagine that there are two companies. One specialises in warehouses and distribution, the other in running the shop floor. They both have a contract with an umbrella company who pays a sum to one and a separate sum to the other. Each provides a different service, which is valued at a different level because it is a different role and it means each receives a different amount of money.

That is, in essence, exactly what’s happening at Tesco. In a past life I used to visit distributors, met various wholesale groups and supermarkets. No supermarket in the UK owns and runs every single distribution warehouse for all the goods that they stock in store. Often these are run by small local outfits, or by packaging companies, or by importers who then supply into stores directly. Sometimes though supermarkets do have coordination sites, and these then supply into their main stores where shop workers place them onto shelves. It’s not a stretch of the imagination to say that each of these provides a different function to the company as a whole and each is valued at a different rate from one another. So it's not a stretch to suggest that the firm might value the work at its distribution sites differently to the work done in its stores. We know this because the price they pay for each service is different.

Ben Southwood argued back in 2014, correctly I might add, that:

“Employers are unlikely to consistently pay above productivity, because they'd lose money. But equally, they'll be unable to consistently pay far below productivity (less the share needed to rent the capital involved) because in a reasonably competitive market firms will compete their workers away with more attractive job offers.”

It's hard to say that supermarkets don't operate in competitive environments, and certainly different stores offer wildly different pay, terms and conditions in their stores and their distribution sites. It's also worth saying that there is no barrier on men applying to be shopfloor workers, and there is no barrier on women applying to work in the warehouse. If there is discrimination it's not coming from obvious barriers to entry for women. 

There are all sorts of reasons that add up to why there is a gender imbalance in the roles (and if Tesco is committed to parity as a corporate goal it might look into addressing there) and there is a good argument that shopfloor workers could make to say they deserve to be paid more by these profitable enterprises. But rectifying that is the job of negotiation, not litigation.

To lower house prices kill the transport unions

That headline isn't quite how the authors of this new research paper would quite put it but perhaps valid all the same. If we want to lower house prices in those expensive conurbations then we've got to kill the transport unions:

This rise in the relative price of housing across most developed countries in the period since WWII has come as the proportion of the population living in big cities has risen in most developed countries. It has also coincided with a period where real transport costs have been flat or (more recently) often rising; that is markedly different from the period between the middle of the 19th century and WWII when transport costs fell dramatically. These phenomena – rising relative price of housing, an end to falls in transport costs, greater urbanisation in population – are plausibly linked. Agglomeration forces – creating incentives to work close to other people – may have got stronger over the past 100 years; transport improvements have allowed people to live further from where they work. The changing interplay between those factors is a major force behind national and regional house price changes.

If we can lower commuting costs then people can live further away from work and so we can use more land. That lowering house prices of course.

Bit hard on all those hard working train and bus drivers of course but we do all agree that house prices, housing affordability, is a national crisis, yes? 

Do we want a wicket keeper running our health service?

Mrs May regards Mr Hunt as a safe pair of hands after the troublesome Andrew (now Lord) Lansley. He stops boundaries and even makes the occasional catch, so it is just a pity he does not score many runs. He implemented some things he inherited but what can you recall of national Department of Health and Social Care initiatives since he took charge over five years ago?

The mid-point between now and when he became Health Secretary and should have formed his vision takes us to “New NHS measures and initiatives in effect from 1 April 2015”. The first, of six, implements the 2014 Care Act with a 506 page user’s guide. Since no one was likely to read all that, the explanatory guide was explained by a Ladybird book on how to be a nice local authority, e.g. (p.8) “Local councils must have good information to help people choose the right care and support.” It has nice large primary school script and coloured pictures of girls and boys. No actions, no specifics. As an anthology of motherhood and platitudes, it is hard to beat.  Needless, perhaps, to say, little has changed because, primarily, councils do not have the resources to do the things we would like.

Space here does not allow discussion of the other initiatives but they all follow much the same pattern.  The big exception is that progress is being made with bringing NHS England and adult social care closer together. The Manchester experiment is important and may show that the horizontal (local) structures are far more important that the vertical (top down) ones. If the Manchester integration of health and adult social care works, it could be argued that national management of NHS England be replaced by NHS areas, defined by acute hospitals, merged with Local Authority adult social care units. As it happens there are about 150 of each so it would just be a matter of aligning borders.

The National Audit Office 8th February report on adult social care brings us up to date and could have been titled “plus ça change…”. Money remains short and the government still has no adult social care strategy: “2009 was the last time a national workforce strategy was published by the Department of Health & Social Care.” The Dilnot Commission 2011 report was exclusively about funding and was rejected. Health Education England, undeterred by their having no responsibility for adult social care, released a draft strategy, Facing the Facts, Shaping the Future – a draft health and care workforce strategy for England to 2027, for consultation until 23rd March 2018 if you feel strong enough. Only one of the eight questions for consultation related to adult social care: “What policy options could most effectively address the current and future challenges for the adult social care workforce?” One could say that was open ended but it also indicates the government does not have a clue. And the 10 year horizon suggests that it can all be left to the next government but one. None of the eight questions offers specific, here and now, options for comment.

The adult social care green paper, if it actually turns up, is now promised this summer.  It was originally due in summer 2016.  The unions are already grumbling that the “experts” are weighted to management and members of the establishment, such as the ubiquitous Martha Lane Fox whose CV, amongst a plethora of good works, does not include adult social care.  They argue that the front line carers and the cared-for are under-represented.  But we should judge the green paper when it appears and taking wide counsel is no bad thing.

The key National Audit Office paragraph is an indictment of the Department that has had responsibility for adult social care for more than seven years: “3.8 Instead of having a national strategy, the Department works principally with Skills for Care, the Local Government Association and the Association of Directors of Adult Social Services to identify and share good practice in recruitment and retention. Skills for Care developed a retention and recruitment strategy in 2011, and published a Retention and Recruitment Strategy 2014–2017. The latter strategy was more akin to a business plan, detailing the activity that Skills for Care would undertake to boost retention and recruitment. The strategies were not an adequate substitute for a departmental workforce strategy. Skills for Care has limited influence over workforce challenges such as levels of government funding for care, and pay, which is set by providers.”

The government response to this will be that an adult social care green paper is due this summer: “government will work with independent experts, stakeholders and users to shape the long-term reforms that will be proposed in the green paper.” The green paper was originally due in summer 2016 and there is no guarantee it will appear. The experts are weighted to management, number crunchers and members of the establishment, such as the ubiquitous Martha Lane Fox whose CV, amongst a plethora of good works, does not include adult social care. Who the other groups, stakeholders and users, will be and how their involvement will take place are unclear. But we should judge the green paper when it appears and taking wide counsel is no bad thing.

Norman Lamb MP and Lord Saatchi have been campaigning for a strategic review, whether by a non-party convention or Royal Commission, of this whole area for some time but Mrs May has been turning a deaf ear. She tried, but failed, to move Jeremy Hunt out of the DHSC and she must, presumably, have had a reason for that. The country wants action not someone who just keeps wicket however well he does that.

What does anyone think we've been doing these past 250 years?

If and when the robots come to take all our jobs then just what is it that we're going to do? George Monbiot has an idea:

But while there is little chance of finding jobs that match students’ hopes and personalities and engage their capabilities, there is every chance of connecting them with good opportunities to volunteer. Perhaps it is time we saw volunteering as central to our identities and work as peripheral: something we have to do, but which no longer defines us. I would love to hear people reply, when asked what they do: “I volunteer at the food bank and run marathons. In my time off, I work for money.”

It's true that George has this rather weird thing about market economies. That people might receive actual money for what they do rather than just kudos or social status. He's rather more Polanyi than Smith, not quite getting the function of money here. It's a method of keeping score of those mutual obligations, no more. And the benefit is that it allows impersonal methods of keeping score with strangers.

Leave that aside though, his thought and desire is that people should, when the robots take our jobs, do more for other people, things enjoyed as well. Instead of keeping nose to the grindstone just to survive we should flower as human beings.

Well, yes, that's rather the point of the automation and that market economy. The automation takes care of the grindstone bit and the market expands the number we can specialise and divide the remaining labour with. Both make us significantly wealthier, a goodly portion of that greater wealth being taken in more leisure. Even more of it being taken not in pure leisure but just in doing "work" which we prefer to do rather than must. 

All of which does make the worrying about robots, capitalism and markets more than just a little bit odd. For they're exactly the things which will create the conditions allowing the desired society. As, you know, Karl Marx himself pointed out. We'll have enough time free from keeping body together to attend more to those enjoyments of the soul.

Really, what does anyone think we've been doing these past 250 years since we started to automate?

Billionaire boys club and their toys

The successful launch of Elon Musk’s Falcon Heavy, whimsically sending aloft a Tesla Roadster driven by a space-suited mannequin highlights a new group of players on the economic scene, driving technology forward. They are the billionaire boys who use money made elsewhere to pursue interests on the cutting edge of exciting technologies.

Paul Allen, who co-founded Microsoft with Bill Gates, put up $25m of his own money to fund Burt Rutan's company, Scaled Composities, and helped it win the X-Prize of $10m for the first private manned spaceflight of SpaceShipOne in 2004. Allen's backed it not for a return, but to speed up access to space by private citizens. As a sideline Allen also funds the Allen Institute for Brain Science, and the Allen Institute for Artificial Intelligence. He put $30m into the Allen telescope array to aid the Search for Extra-Terrestrial Intelligence (SETI).

Elon Musk made his first millions with Zip2, an internet city guide, receiving $22m when Compaq bought it. He co-founded Paypal and received $165m when it was snapped up by eBay. Like Allen he has helped to fund private enterprise spaceflight, founding SpaceX with $100m. SpaceX developed the Falcon rocket that sends Dragon capsules to the International Space Station (ISS), and which has pioneered re-usable launch vehicles.

Musk also founded Tesla Motors to advance electric car technology. Tesla has pioneered battery innovations that solved the short range problems that held back the spread of electric vehicles. One of Tesla's backers is Larry Page, who co-founded Google with Sergey Brin and has also backed alternative energy sources. He has donated $20m to the Voice Health Research Institute after developing vocal cord issues of his own.

His Google partner, Sergey Brin, is worth billions, but draws an annual salary of just $1, as Page and Musk do, as Steve Jobs did. He backed the genetic research company, 23andMe, founded by his then wife, Anne Wojcicki, and has also put money into alternative energy, including wind-powered electricity from high performance kites, and has even funded the development of lab-grown meat.

I met Sergey Brin and Larry Page (and Paul Allen) at Soyuz launches from Kazakhstan, there to watch other billionaires ride to the ISS as "mission specialists" – formally called "space tourists." What struck me very forcibly was how boyish they all are, bubbling with enthusiasm over new gadgets and ventures. These are boys who can afford to play with very expensive toys, and their enthusiasm is bringing forward the day when their toys become available to the rest of us at affordable prices.

Other players in this billionaire's game include Jeff Bezos, who founded Amazon. His toy is the New Shepard vehicle of his aerospace company, Blue Origin. A manned capsule is being developed to take astronauts into orbit at the top of the flight path, with the New Shepard setting itself down on Earth to be readied for another flight.

The common theme is of billionaires who put their spare wealth into bringing forward the technology they dreamed about as boys, and never quite grew out of. They push technology forward because they want to see the toys - the private space-planes, the augmented reality experiences, the high performance electric cars, and the driverless cars that will one day whisk commuters to and from work.

The billionaire boys want to see tomorrow, and are putting resources into making it come sooner. And the rate of technological progress is accelerating because of their activities.

Wall of Tyrants

An important anniversary happened this week. The Berlin Wall which had divided East and West Germany has now been down longer than the 10,316 days it was up.

Construction of the wall began in August 1961 by the German Democratic Republic, a state that was neither German nor Democratic; nor, indeed, a Republic. It was erected to stop the flood of East Germans fleeing to the free and prosperous West. The GDR and the Soviets called it “the anti-fascist wall,” equating Western countries with fascism, and saying it was to keep their peoples out. In reality it was a prison wall designed to keep East Germans entrapped under a brutal communist tyranny.

Many did manage to escape over the years that the wall stood, and up to 200 people were killed in the attempt. The wall had watch-towers, barbed wire and mines to thwart anyone trying to cross, and East German guards were ordered to shoot to kill anyone seen trying to escape.

The wall was the setting for many famous historic incidents, including John F. Kennedy’s “Ich bin ein Berliner” and Ronald Reagan’s “Tear down this wall.” I went through it myself via Checkpoint Charlie, and found it was like entering a drab and shabby prison. Where West Berlin was alive with evening and night life, East Berlin was a police state that discouraged revelry.

The wall was a potent symbol of a communist world on one side that needed to keep its people imprisoned, and a free world on the other side. It divided a rich West from an impoverished East. It was finally brought down when there was a mass exodus of East Germans to the West via Czechoslovakia and Hungary, which refused to close their borders. East Germans did the unthinkable and demonstrated in the streets. The GDR government wanted Soviet troops to suppress them, but Gorbachev refused and the authorities caved in. On a jubilant November night East and West Germans scaled the wall and mingled, and began taking it down.

This week’s anniversary serves to remind us how brutal and repressive were the socialist regimes that dominated Eastern Europe. It is a timely reminder of what should never be repeated, of a road that the world should not travel again.