Come and do your gap year at the ASI—and get paid!

Backpacking around South-East Asia is great, but do you know what's more fun? 

That's right, spending 6-9 months in the ASI office with all of your favourite neoliberals!

It's that time of year again: the ASI is looking for two new employees, to start in September 2017.

As last year, the crucial requirements are that you:

  • Are on a gap year; you must be 18-20
  • Are open-minded, inquisitive, friendly, intellectually curious, eager to learn and interested in policy
  • Know and have an opinion on the ASI's perspective and what it does
  • Have a broadly liberal perspective on the world

Does that sound like you? If it does, you've passed the first hurdle. Congratulations! You're one step closer to potentially becoming the latest ASI intern. 

Your duties will include:

  • Organising lunches and dinners, keeping the database up-to-date & doing secretarial work for the directors
  • Managing the blog
  • Reviewing and editing ASI publications
  • Selling ASI merchandise
  • Logging RSVPs for events
  • Meeting a wide range of interesting & important people
  • Learning about social & political science
  • Socialising with the staff
  • Carrying out self-directed research
  • Writing blog posts
  • Setting up and cleaning up after events
  • Mailing out publications to subscribers
  • And, of course, having fun! 

Previous interns have gone on to work with the Adam Smith Institute, including the ASI’s current Executive Director, Sam Bowman, and Head of Digital Policy, Charlotte Bowyer, who was a Gap Year intern in 2009-10.

The role pays the National Minimum Wage. All applicants will interview with President Madsen Pirie and Deputy Director Sam Bowman at the Adam Smith Institute offices in Westminster during the summer.

Please send a CV and cover letter of around 500 words to gapyear@adamsmith.org by Sat 1st July 2017.

Excess diesel NOX emissions cause 0.07% of deaths globally

So we're told in this latest paper at least, the NOx emissions from diesel engines, over and above what emissions standards say they should be spewing out, cause 0.07% of deaths globally:

Diesel driven cars, lorries and buses churn out far more air pollution than standard testing procedures suggest, leading to many thousands of unreported deaths, scientists claim.

The excess emissions of harmful nitrogen oxide (NOx) exhaust gases can be linked to 38,000 premature deaths worldwide, according to the new research.

Mr. Google, our friend, tells us that there are some 54 million deaths a year globally. Thus that 0.07%.

At which point we've got to ask the obvious economic question - compared to what?

The heart of the problem here is that we have three things we'd like to have. Low diesel consumption for cost and CO2 reasons, low NOx creation for those health reasons and low cost engines just on the general basis that cheap is better than expensive. And as with the engineering wish list, faster, better, cheaper, we can only have two of the three.

As we crank up the combustion temperature in order to gain fuel and CO2 efficiency we end up creating more NOx. We can only avoid this by having expensive, not cheap, diesel engines - or adding the expensive urea systems to such vehicles. This is not an optional aspect of our universe. We cannot have all three, we can only have two of the three in pretty much any combination we desire. Low NOx is possible cheaply at the cost of general fuel efficiency, we can have low NOx and efficiency at high cost and so on.

So our 38,000 deaths are compared to what? To the extra cost of having no cheap diesel engines, only expensive ones.

No, we don't know the answer here either. But we do insist that this is the correct question to be asking. We've limited, scarce, economic resources. So, what is it that we'll have to give up to gain this purported reduction in deaths from NOx? For without that answer we cannot possibly hope to answer the question of whether we should do it or not.

How did France's Robin Hood Tax work out?

Back in 2011 and 2012 I wrote quite a bit about the financial transaction tax (FTT) that was being proposed by the EU, and which is now being proposed by Labour. We have a FTT on shares in Britain in the form of stamp duty, but now Labour want to impose it on other financial assets too.

An FTT is a tax, usually a fraction of a percent, on trades of financial assets. It’s sometimes referred to as a Tobin Tax and is intended by its advocates to reduce high-frequency trading which, they claim, adds random noise to market prices and increases volatility. 

In this sense the tax may be efficiency-raising in that it shifts costs these traders impose on others onto those traders themselves. However, if high-frequency trading is not mostly based on randomness, as Sam Dumitriu argues here, then curbing it will slow down the incorporation of new information to market prices, increasing market volatility and making markets less efficient.

FTTs are also sometimes referred to as ‘Robin Hood Taxes’ by people who think they will raise lots of money. Some of these people look at the total volume of a market and presume that taking 0.5% of that will not reduce the volume of trading very much. This is somewhat at odds with the other case for the tax – if it changes behaviour it won’t raise much money, if it raises much money it won’t reduce the supposed negative externalities that high-frequency trading creates.

The EU still has not implemented a Eurozone-wide one. France, however, did introduce a 0.2% tax on purchases of shares in any publicly traded company with a market cap above €1bn (£789m), on “naked” short sales of sovereign credit default swaps, and on some high-frequency trading. It included several provisions that made it less restrictive than a true FTT, including a rebate scheme for trades of the most liquid shares and for intraday trading. Still, we can look at this to see what the impact of stamp duty on shares might be in Britain, and what extending this to other assets might be.

At the time I pointed to the empirical evidence and warned that France’s tax could reduce market liquidity and raise volatility, and not raise very much money either. Sweden introduced a financial transaction tax in the 1980s which ended up raising one-fortieth of what its backers had promised, drove many exchanges to London, and was abandoned after less than ten years. I reckoned that France would see many similar results.

Five years on, what have been the consequences of France’s transaction tax? A recent European Central Bank paper looked at the impacts on French equity markets, and for the most part it concludes that the outcomes of the tax were quite bad.

Market liquidity fell a lot, by 20% for affected stocks. Revenues were much lower than anticipated – an estimated €475m instead of the €1.6bn that had been predicted – “which once again points at an underestimation of the impact on revenue-generating market activity”. 

Importantly, volatility rose and price efficiency fell, even though the tax exempted intraday trading (allowing “short-term arbitrageurs to continue eliminating price inefficiencies quickly”). Though the overall effect was small (but statistically significant), the rebate scheme masked a large effect on volatility in shares that were exempt.

The paper’s authors conclude that the French FTT had an overall negative impact on market quality, where reducing market liquidity led to less efficient pricing of assets and more volatile price movements, and effectively priced high-frequency trading out of existence altogether in affected shares. “The decrease in volume associated with the FTT hurt liquidity and crowded out “useful” trades.” 

In order words, as I said in 2012:

“High-frequency trading allows markets to be highly sensitive to new information and to intermediate between buyers and sellers who may not be in the market at the same time. Stopping high-frequency trading would have the effect of making price shifts more sudden, unpredictable and large.” 

More volatile markets are riskier ones, so the cost of investing is higher and you get less of it. We don’t want that. All of this should make us treat a British FTT with extreme caution, and indeed make us consider abolishing stamp duty on shares instead of extending it to other parts of the market.

PS: I can’t resist pointing out my other prediction, about a man whose approval ratings eventually fell to 4% and whose party now seems to be on its deathbed: “Along with policies like the 75 per cent upper tax rate Hollande proposed during the election, the French may soon regret electing their blundering new President.”

The great bidding war

Many general elections turn into bidding wars, and this election is certainly no exception.  Instead of proposing measures to grow the economy to the benefit of most sections of society, some parties vie to see how much money they can take away from a smaller group in order to hand some of it out to buy the votes of a larger group.

They promise largesse and nominate tax increases that they say will pay for it all.  Unfortunately, they never seem to have heard of a dynamic, as opposed to a static, economy, and seem unaware that taxation changes behavior.  So far we have seen proposed increases in Corporation tax and income tax hikes for high earners.  These have been variously promised to fund untold billions of extra spending on education, health, social care, public sector pay, and a raft of other things besides.

Critics have pointed out that the sums do not add up, but it is worse than that.  The proposed increases in Corporate tax and high earner income tax will almost certainly both lose revenue.  The steady reduction in Corporation tax, down from 28 percent to 19 percent, has seen huge increases in the revenue it generates, while the reduction in top rate income tax has not only increased revenue, but greatly increased the proportion of total income tax paid by high earners.  The top 1 percent of earners now contribute 27.5 percent of all income tax paid, while nearly half of the population pay no income tax at all.

Corporation tax falls on shareholders to some extent, and on labour to a much larger extent.  Higher tax rates lower investment and activity, and in some cases lead to relocations beyond the reach of the tax man.  Higher taxes on income reduce incentives and expansion, and encourage people to move away, while discouraging others from moving in. 

Increases in both of these lead to falls in revenue, so far from promising who will receive the imagined gains, those proposing the increases should be telling us how they intend to finance them.

Another example of something we've long maintained to be true

In rather too much of what it tries to do government is counterproductive. Examples abound, raising the minimum wage to aid the incomes of the poor leads to some having no incomes at all. Germany's vast push away from fossil fuels has led to a rise in the country's consumption of coal, cracking down upon illegal drugs just raises the profit margins for those who continue to deal them.

There is a subset of this, which is that government often designs plans to encourage some activity. Those plans being either so absurdly complicated, or come with such side effects, that they diminish, not increase, the desired amount of whatever it is. And so it is with forestry in England

The figures mean that a Government pledge that 12 per cent level of woodland cover should be reached by 2060 is looking increasingly remote.

What joy, there is a plan. That plan includes paying subsidies to those who plant trees:

Landowners who wish to plant a forest must negotiate a "complex and bureaucratic" system in order to obtain a Government grant, the report said. 

Three agencies, the Forestry Commission, Natural England and the Rural Payments Agency administer the main grant available, the Countryside Stewardship Scheme. 

...

Witnesses told the committee that the application process was “tortuous”,“bureaucratic”,“ overly complex” and “not fit for purpose”.

Quite how a simple grant to stick acorns in the ground can become bureaucratically tortuous we're not sure. It doesn't need the usual panoply of diversity advisers, health and safety checks, inequality impact statements and all the rest, does it? They're not out there demanding disability access and racial balance are they? 

Our own experience of business tells us that people shouldn't apply for government grants for anything. Precisely because to do so is to get sucked into a morass of bureaucracy making the money on offer not worth the effort. It's nice to have another example to add to the portfolio but there's got to be a better way of getting things done than this, no?

Perhaps even that those who would like a few trees around for their children get on with the acorns in holes thing and the rest of us agree that it's their land and nowt to do with us? Nor our money?

A bigger NHS budget wouldn't solve the ransomware problem, no

Some to many NHS trusts have found their computers encrypted, locked and held to ransom. Pay $300 in Bitcoin to... or else. At which point the usual and entirely unsurprising insistences that if only the NHS had a bigger budget then this would not have happened.

And that's not in fact true. But, of course, it is being said:

The ransomware attack is all about the insufficient funding of the NHS

No, as ever, this is not about the amount of money, this is about how the money is spent:

“The problem is that the old IT systems were never designed to withstand the forces now ranged against them,” Moores said. “You may note that US hospitals haven’t been so badly hurt if only because they have the money to use more up-to-date systems rather than coax older systems to keep going.”

No. Again, it's how money is spent, not how much there is.

Yes, there's that interesting side issue that the NHS used to pay Microsoft for support on that outdated Windows XP and then decided they wouldn't. But that makes no difference here as the company didn't release the necessary update to anyone until this attack had already started. Why should they, they announced they wouldn't be supporting this any more some years back.

No, our problem is that the NHS is a government system, those American hospitals are not. And the one thing that governments really aren't good at is maintenance. Anyone with any experience of the Soviet block in its pomp knows this.

We've even tried lavishing fortunes on NHS IT and it didn't work well.  Some £12 billion spent and by some reports not a single usable line of code resulted - possibly an exaggeration but still. And IT spending in the NHS is increasing at a reasonable clip, ahead of inflation at least.

Computer security is maintenance by the way. You don't need ribbon cuttings on masses of shiny new kit, there are no grand projects to announce, no one does stand up in Parliament and detail how 10 web monkeys upgraded 500 PCs yesterday. Which is exactly why a government run system ends up splashing £12 billion on nothing and spends nothing on security maintenance.  

It's entirely reasonable that the NHS runs on an old operating system by the way. There is so much sector and function specific code out there that upgrading would both be hugely costly and really not worth it. But money does have to be spent upon security maintenance, that one thing that a politically driven and centralised system never is any good at, maintenance.

Something that puzzles us deeply about the Labour Party Manifesto

We are told that government should have much more money. OK, we don't agree, but that's politics for you. We are also told that companies should pay much more in tax. Well, apart from the obvious point that companies never do pay tax, the incidence is always upon the wallet of some live human being, OK again, that's politics. No one has ever said that electoral platforms have to make logical sense.

But we do think that we'd all sort of hope that such electoral platforms will add up. Which is where our puzzlement comes in. For the claim is that government will get much more money by raising the rate of corporation tax:

UK corporation tax receipts surged to a record high during the past financial year despite the main rate falling from 30 per cent in 2008 to 19 per cent today.

We're really just not sure how, if lower rates bring in more money, higher rates will also bring in more money.

Bit of a puzzler, eh? 

The problem with over arching regulation is that it concentrates error

Yet another example of why market competition beats bureaucratic regulation. For if we have such competition then some certain amount of the people doing it are going to be wrong. Wrong in what they're doing it, how they're doing it, what they think people want to have done - the very fact that many people are doing it in many different manners is simple enough proof of that.

True, there's always the possibility that different people want different things done in different ways but we mean something more basic here, before we get to that stage. And thus we could indeed ponder the idea that if all the clever people just told us what to do then we'd avoid the waste of that competition and that wrongness.

Except it doesn't actually work that way:

Sir James Dyson has won a shock victory in the European courts over Brussels rules which the company says unfairly penalised its vacuum cleaners.

An appeal in the European Court of Justice said a previous ruling from a lower court against Dyson had “distorted the facts” and “erred in law”.

The EU decided that vacuum cleaners should be tested for their energy efficiency. They then went on to determine how they should be so tested.

The billionaire entrepreneur argued that the tests are only relevant to vacuums with their dust bags empty and do not cover them when they are full, as they would typically be in normal use. A full vacuum would typically use more energy.

Dyson’s vacuums use a “cyclonic” design without a bag to collect dust and the company argued that the tests used by the EU unfairly disadvantaged its products.

Two years ago the company argued in the European general court that there was a way of testing conventional vacuums when the bag was full, so a comparison could be drawn between the two designs.

The European Court of Justice today upheld parts of Dyson’s appeal, backing the company’s claims that tests are available to measure a vacuum’s performance when full.

It also backed the British company’s by saying tests should “measure the performance of vacuum cleaners in conditions as close as possible to actual conditions of use”.

That there is error in a system is one of those unfortunate truths about any system containing human beings. What we want therefore is a system which sorts through the errors as fast as possible and eliminates them.

Which is really what a market does for us, it's an experimentation machine. This works, that doesn't, this does but no one wants it, nope, they want this but it's currently impossible and so on. Bureaucratic regulation simply concentrates the error. The entire continent of Europe has had the energy performance of vacuum cleaners wrongly reported to it for years now precisely and exactly because we used the bureaucratic method of determining the rules by which we do so.

We'd all be much better served by Which? and the equivalents across Europe devising their own standards and that way we'd be able, through that terribly wasteful market trial and error, be able to zero in on the testing standard that was actually useful.

 

The effect of Labour's corporation tax

The Labour party has proposed increasing corporation tax to 26%, from its current rate of 19%, and in contrast to the government’s proposed reduction to 17%.

That would leave the UK with a tax rate one and a half times the level the government is proposing, putting us around the middle of European corporate tax rates rather than near the bottom (although still the lowest in the G7).

Labour claims that this will raise around £20 billion to fund various spending commitments.

On a simple mathematical basis, that looks about right.  The Treasury estimates that a 1% increase in the corporation tax rate would raise about £2.3 billion.  Multiply that by Labour’s proposed 9% increase and allow for inflation until 2021 when they propose to implement it, and £20 billion looks reasonable.

The problem is that the economy and business do not remain static while politicians fiddle with the tax rates.  People and companies react to changes; and the bigger the change is, the more they react.

A 9% increase in tax rates therefore is highly unlikely to raise nine times as much as a 1% increase.

 

Higher rates, lower revenues

One thing that is increasingly well evidenced is that higher tax rates generally result in lower than expected revenues.

This is not just shown by the outcomes of previous tax changes, but is also what we would expect from people reacting to tax changes.  When tax rates are increased, the return on investment is reduced, so there will be less investment and therefore less growth.  If investors and entrepreneurs will see less of the rewards, there will be fewer new businesses started up, less investment in expanding existing businesses, and fewer international businesses deciding to locate in the UK.

The effect of this is difficult to quantify, but to get an idea we can look at the time when corporation tax was last at the 26% proposed by Labour.  That was in 2011/12, and the tax at that level raised around £41 billion[1].  Add on inflation and that would be around £44.5 billion today.  However in fact, with the rate cut to 20%[2], the tax revenues have now soared to almost £50 billion a year.[3]

Although the rate is now significantly lower than it was in 2011, the corporation tax collected is actually higher because the lower tax rates have encouraged companies to set up or expand, or to set up operations in the UK.

If that trend continues, the government’s proposed 17% might raise around £52.5 billion, £8 billion more than it raised when rates were last at Labour’s proposed 26% (all figures at today’s prices).

Assuming that trend works the same in reverse, the proposed rate increase to 26% would be expected to reduce corporation tax revenues by £8 billion, not increase them by £20 billion, as the UK becomes a less attractive place for business investment.

                             

Who bears the pain of corporation tax?

This is not just an abstract matter of changes in an index of GDP.  Nor is it merely a question of whether investors see the value of their investments fall.  The effect will be real and wide-ranging, because any reduction in investment means fewer jobs, and less well-paid jobs, as companies reduce investment and try to cut costs in response to higher taxes.

The Institute for Fiscal Studies responded to Labour’s proposal by saying that “taxes are paid by people” and so corporations do not actually pay tax.  They have been criticised for that by supporters of higher taxes, with one saying the IFS is “so obviously factually wrong … companies are separate legal persons … only they can pay the corporation tax a company owes”.  However that criticism confuses the practicalities of “paying”, transferring money to the tax authority, with an economic concept of payment in the sense of bearing the burden of the tax.

The truth behind the IFS claim is that people, rather than companies, suffer the burden of corporation tax.  Either the company has less wealth (so the shareholder bears the burden), or the company increases its prices to keep its after-tax income the same (so the consumer suffers), or wages are reduced, staff are laid off and new staff are not hired, to cut costs and maintain the same after-tax income (so the workforce bears the pain).

In practice there is a combination of the three.  However, in an open, free economy, there is usually not much scope to increase prices (the business would become uncompetitive), and if shareholders see too much of a cut in their returns then they will invest elsewhere.  That means that the main pain of increasing the corporation tax rate falls on the workforce, as the company seeks to cut costs to maintain its after-tax profits.

And not just the company’s employees that lose out; some of the main losers are young people trying to find their first jobs, only to discover that few companies are hiring because they have cut back on their expansion plans in the face of higher taxes.

Pretty much all economists are agreed on this; the only question is how much of the burden of a corporation tax rise falls on workers rather than shareholders or customers.  However a major study by Oxford University’s Centre for Business Tax[4] concluded that a rise of £100 in corporation tax would reduce wages by £75, through a combination of lower wages and fewer jobs.  Some studies have found even higher tax burdens on the workforce, others lower, but the Oxford study is one of the largest.

If 75% of the burden of increasing the tax rate falls on the workforce, that means that Labour’s proposed £20 billion a year from extra corporation tax receipts would reduce wages by £15 billion a year.

With average private sector wages of just under £26,500[5], that cut in companies’ salary bills is equivalent to over 565,000 jobs.

 

Knock-on tax losses

If wages are reduced by £15 billion as companies react to higher corporation tax rates, that will also reduce the government’s income tax and national insurance receipts.

On that average private sector wage of £26,500, the government would expect to take around £7,720 through income tax and National Insurance.  That means the lost wages of £15 billion could see a fall of £4.4 billion in the Treasury’s revenue from employment taxes.

 

Double whammy

Would the fall in wages happen as well as the fall in corporation tax receipts?   Yes, it could, because they are two results of the same process.

As tax rates are increased and companies invest less, because the after-tax rewards are lower, two things happen; company profits are lower, so there is less to tax, and also there are fewer jobs and those that remain are less well paid.

The effect then is potentially disastrous for the Treasury; lower company profits to tax and less employment taxation.  Plus of course the additional welfare costs; benefits for those who are unemployed because of the reduced investment, and in some cases higher tax credits for those who are still in work but on a lower income.

With a potential loss in corporation tax receipts of £8 billion and lost employment taxes of £4.4 billion, the government could be looking at a potential loss of over £12 billion of tax revenues, if this policy were implemented, not to mention the huge financial, social and personal cost of a possible 565,000 people losing (or failing to find) jobs.

The fact is that, although very important to the company, profits are a tiny part of what companies do; far more important are the goods and services that they provide and the employment opportunities they create.  Over-taxing those profits, which may only be a few percent of turnover, risks losing all the other advantages.

Although taxing companies looks like a painless way for the government to raise money, it is far from that; the pain of lost taxes and lost opportunities can be large and widespread.

 

[1] That figure is based on HMRC data for tax revenues in the later part of 2011/12 and the early part of 2012/13, because corporation tax is mostly paid in the following year.

[2] It is now reduced further to 19%, but because of the timing of when corporation tax is due, the first tax payments under the 19% rate will not be due until the end of 2017.

[3] Source: HM Revenue & Customs – receipts.

[4]The Direct Incidence of Corporate Income Tax on Wages”, Arulampalam, Devereux & Maffini, Oxford, 2009.

[5] National Statistics, “EARN02 – average weekly earnings by sector”, January 2017 (latest finalised data

Maybe there are just too many such graduate teachers?

It is possible to somewhat make fun of these Yale graduate students who are on hunger strike over the terms and conditions of their work. As indeed some other Yale students have, by setting up a barbeque just next to their hunger striking station. The strike itself seems a little weak too, there are reports that anyone who feels really hungry can leave, eat, then come back. It is not eating while hunger striking publicly, rather than not eating apparently.

However, they're right, they have identified something of a major problem:

Unfortunately, this describes little of today’s reality. I knew this going into graduate school, but I went for it anyway, because I wanted to do nothing more than teach English in college the way it was taught to me.

....

This means two things for people like me, who are graduate teachers. First, it means that universities like Yale depend on us to teach their students but don’t give us any of the job security that the professors have. Second, although Yale says I’m in training to become a professor one day, it’s likely I’ll never have the chance.

Instead, if you check back with me in five or ten years, you’ll probably find me among the many thousands of people who have a PhD but can barely hang on to a place in the middle class. I may not have health insurance through my job, much less paid vacation, an office or any control over my schedule. In fact, it’s likely I won’t even know where my paycheck will come from further out than four months. In academia, you’re now less secure the more experience you accumulate.

Out here in the real world we're really pretty sure that when an occupation leaves you with a paltry income this is the world's way of saying that you should go and do something else. This is true of the business making a loss, the farmer unable to survive without subsidies and yes, the would be worker facing derisory pay as a result of too many other people clamouring to do the same job.

We're even really certain that a professor or two over in the economics department will be able to explain this to people. This is just what happens with an over supply of labour.

But the important, and unsaid, point is why is there such an over supply of said labour? The answer being that there are simply too many graduate students in American universities.

It's worth noting that a PhD over there is not, as it is here, the production of a thesis, the addition to the sum of human knowledge by some small amount. It takes rather longer, up to 7 years, and includes a certain amount of learning how to be a professor. Thus these teaching duties which they undertake. It's not entirely true but it is largely so that an American PhD is the training program to be a university professor in the fullness of time.

Which is where the problem is. The universities are training many more such professors manque than they will ever be able to employ as actual professors. Not just many more but many times more. And thus this problem of those who have this very expensive training but who are unable to grasp the brass ring at the end of it.

The answer is for those graduate programs to shrink considerably. Perhaps some subjects more than others - there's not really a use for advanced degrees in critical studies, gender studies perhaps, outside future employment in academia. And if the training courses are producing more than can be absorbed by the universities then it's the training courses that should be cut, no?  

But back to our basic economics. The bad pay and conditions of these people is a symptom of an over supply of people with this training. The conditions themselves should thus dissuade people from following this non-career path. But at root the diagnosis is simple. There is an over supply, people should be going and doing something else.

Don't forget, absolutely everyone else on the planet has also had to face the idea that there's something they'd love to be doing but there's a woeful shortage of people willing to pay them to do it. Odd that a university system is able to teach that point to its students really.