Sadly, Andrew Rawnsley won't understand why we agree with him

Andrew Rawnsley gets part of this right. It is indeed true that the 1930s were the last time that private housebuilding was putting up those 300,000 houses a year we think we need, or at least we'd like to have. However, he entirely misses the why of how this was so. Even though he links to a piece in his own paper which points it out very clearly. Concerning Neville Chamberlain:

The interesting question for today is how such a failure became prime minister in the first place. The answer is that he was once a success. He rose to the top on the back of a great reputation as a Tory social reformer. One thing he was particularly good at was housing. Planning for housing. Improving housing. Promoting social housing. Stimulating housebuilding by the private sector. He made his national name in the 1920s as health minister, a position he used to revolutionise planning, expand provision for the poor and get more homes built. His preoccupation with bricks and mortar began as mayor of Birmingham and continued when he was chancellor. The number of houses built during his time at the Treasury rose dramatically. Many of them are the 1930s semi-detached homes that still put a roof over the head of hundreds of thousands of people, particularly around London and southern England.

I commend that successful Chamberlain to Theresa May and Philip Hammond. As they wrangle with each other and cabinet colleagues about what to do with next month’s budget, the prime minister and chancellor should emulate what the Tory with the brolly did about housing.

We agree entirely, of course we do. But Rawnsley is insistent that this means government must be doing something about it which isn't the lesson to be taken at all. For as he links to, this is the reason it all worked back then:

Houses were cheap because the supply of land for housing was very elastic, which in turn meant that there was no incentive for developers to sit on large land banks. Underpinning the availability of land for house-building was an almost complete absence of land-use planning restrictions which applied to only about 75,000 acres in 1932; the draconian provisions of the 1947 Town and Country Planning Act were still to come.

In the 1930s those private housebuilders were free to build houses people wanted to live in, where they wanted to live. Absent those draconian provisions of the Town and Country Planning Act. As we've been saying for many a year now the answer is thus obvious - get rid of those draconian restrictions by blowing up the Town and Country Planning Act and successors.

Rawnsley's mistake, one shared with all too many others, is to think that the solution to a problem is that government must do something. When all too often the solution is that government do less, or stop doing something. As here, when government stops restricting housebuilding then more houses will be built.

And we do want more houses built don't we? Houses people want to live in, where people want to live? Why wouldn't we use the method which managed to achieve this last time?

This story about pensions isn't quite what it seems

Britain's pensions system is appalling apparently:

British workers can expect among the worst pensions in the developed world, according to a report from investment bank UBS, which compared the retirement outlook for a 50-year-old woman in major cities across the globe.

UBS calculated how much a country’s basic state pension, plus “mandated” pensions such as the UK’s automatic enrolment scheme and Australia’s “superannuation” scheme, would pay out as a proportion of the income of a 50-year-old “average Jane” living in the capital city.

This doesn't actually say anything at all about what pension can be expected. It only says something about the mandatory, state and other, pension that will be accumulated. Thus a system which deliberately and specifically encourages private pensions saving will do badly by this measure.

When we include such private pensions savings the UK comes second equal apparently.

Just to reiterate the point:

Private pension arrangements were not included in the study, which looked purely at mandatory arrangements in each country – in other words, the compulsory amounts that employers must set aside, plus the payouts from state pensions.

Why would a pension system be bad just because people voluntarily save for their own old age? 

There is an amusement here as well. For in all the wealth statistics (and yes, this is standard, entirely so) private pensions savings are counted as wealth. State pensions, including those owed to state employees but which are pay as you go rather than funded, are not counted as wealth. The argument being that governments can and do change their minds so we cannot regard such promised sums as being secure.

Thus pensions systems which use the private savings method, those which build real owned wealth, count as bad pensions systems. Ones which rely upon the caprice of future governments are good ones. Well, is that amusing, surprising or despicable?

Your call there.

We thoroughly approve of all of these community energy projects

Admittedly, we don't enthuse over them for the same reasons many others o but there's still something wondrous going on.

A wave of new publicly owned companies is taking on the big six energy suppliers, as local authorities search out new revenue and seek to restore faith in public services and tackle fuel poverty.

Publicly owned doesn't enthuse us, that faith in public services similarly.

No shareholders to worry about....(...)...The driving forces for these councils stepping into the complex, heavily regulated energy space are largely twofold. One is the need to create a new revenue stream in a time of austerity,

That it is a public revenue stream rather than payment to shareholders doesn't mean that the users of the energy aren't being charged to produce whichever of those two now, does it?

 Bristol Energy is biggest publicly owned energy supplier, with about 110,000 customers; Robin Hood has just over 100,000. Both have created more than 100 jobs locally, but neither has yet recovered their start-up costs.

As we've noted before covering those start up costs is rather the point of capitalists. Who lose everything if it doesn't work out - as the vast majority of business adventures don't.

However, as we say, we do thoroughly approve of the basic idea here:

Part of the reason councils are getting into energy is the barriers to market are not as great as they once were...(...)...“This is high-risk stuff. The sector is complicated. You [the council] probably don’t have the resources. You’ve probably underestimated the costs. And that’s with costs of entry falling dramatically,” he said.

Falling costs of entry can only have good effects upon the market as a whole. Major technological, even social, changes occur precisely because of the entry and exit of firms from a market. Thus a thing that we'd very much like, near a necessary precondition in fact, is ease of entry into the market. This has now been made much easier. Excellent.

That is, we've made market entry easier, people are entering the market - in whatever guise, more market players is still a good idea - and so at least one of the things we need to do about Britain's energy market has already been done. Isn't that great?  

The Great French Butter Crisis of 2017

Another entry into the anecdata bank convincing us that the last Frenchman who understood economics was Frederic Bastiat. France is suffering from a butter shortage, the croissant makers just cannot get enough of the stuff, the supermarket shelves are empty.

Quite why doesn't particularly matter - whether demand has risen or supply fallen doesn't make a difference here. What does matter is the reaction so far:

French consumers have not yet seen butter prices rise at the checkout because supermarket groups fix their prices once a year.

Sigh.

Which is, of course, to entirely miss the point of a market economy with a price system. To be able to vary prices so that supply and demand match.

All that is necessary to end the Butter Crisis is for the price of butter to change. On the commercial and wholesale side this is happening, industrial supplies have had price movements. But for something like butter retail demand is an important part of the whole. So, what happens if that retail price doesn't change? Well, facing those higher wholesale costs the supermarkets aren't exactly going to rush out to purchase stocks. Nor, given the higher prices available elsewhere will producers produce retail sized portions, will they? 

Further, facing no price rise themselves consumers won't substitute away from butter. Off to lard, or goose fat, margarine, or even allow that toast to go commando under the confiture.

When either supply or demand change it's entirely madness not to allow prices to change, for the point and purpose of the price system is to balance supply and demand as they change.

What the heck are they using as economics textbooks over there? 

We should be careful glorifying Denmark

Last week, Denmark was mentioned in a American TV debate between Bernie Sanders and Ted Cruz. Instinctively, as a Dane, I always feel a sense of pride whenever Denmark is mentioned on the big stage. However, in this instance I would like to take a step back and look at the facts because Denmark is far from the utopia politicians and pundits often claim it is.

Bernie Sanders is one of the advocates for implementing a welfare model similar to that of Denmark and for a good reason. In many ways, Denmark looks to be a very attractive country, which it is (except for the weather), but not always for the reasons stated in the public. Especially in this TV debate, Sanders mentions he is ready to raise taxes for every American in order to fund a system similar to that of Denmark. However, as it is mentioned by the moderators, Denmark pays the highest taxes of all developed countries in the world. Now, I don’t believe every country is able to raise their taxes the way Denmark has, unless they share similar values. A combination of strong work ethics and  high trust in one another is what have made the welfare state possible. This is not something that has happened concurrently with the creation of the welfare state. Actually, this predates the welfare state and is probably what has been the main factor for upholding it over time as well. Nima Sanadaji finds in his book, Debunking Utopia, that the explanation lies in the Danes and the Scandinavian work ethic, among other things.

Sanadaji also makes the claim that Scandinavians are actually doing better in America than their peers back home. For example, he presents a statistic showing the GDP per capita for the Scandinavian countries and their peers in America. The average GDP per capita for Danish Americans are $70,925 compared to $45,697 for Denmark. That is quite a difference that potentially comes from the fact that the features mentioned above didn’t just disappear when Danes travelled to America between the 1850s and 1910s. Something might therefore suggest that Danes aren’t doing well because of the welfare system. Rather, Danes appear to thrive better in the American economy because of the social institutions instilled in the Danish way of life. Milton Friedman was once confronted on this matter by a Scandinavian economist stating that there is no poverty in the Scandinavian countries. To that Friedman responded with “that's interesting, because in America among Scandinavians, we have no poverty either”.

This leads me onto my next point. Quite often it is argued that Denmark became wealthy because of the welfare system, not in spite of. But this is simply not true. Denmark was wealthy long before the welfare state came about. Combined with its social institutions, Denmark's early adoption of property rights led to a high degree of personal independence among Danes – a solid foundation for creating a wealth society.. Actually, Denmark was for a long period a low tax country and at one point in history its levels of taxation was on a par with the United States - until the middle of the 1960s where the development of the Danish welfare state began. The welfare state merely came about because of the wealth created before.

Screen Shot 2017-10-25 at 14.51.35.png

The above graph is in Danish, BNP translates as GDP and shows combined taxes.

In addition, Denmark has been able to uphold the welfare state, not only because of the social institutions, but because it has a capitalistic economy. Year after year, Denmark is among the most economically free countries in the world. Each year, the Fraser Institute measures the economic freedom of several countries - this year 159 countries are measured. They measure the economic freedom of the countries on a scale from 1 to 10 in five different categories where 10 is completely free: Size of government, legal system and property, sound money, freedom to trade internationally and regulation. This year Denmark ranked 15th overall - just four spots lower than the United States which ranked 11th. However, the one thing that always drags Denmark down the rankings is ‘the size of government’. Therefore, if we are to exclude the other categories and only look at ‘the size of government’, then Denmark suddenly drops down the ranks to a whopping 154th out of 159 countries. If we disregard ‘size of government’ completely and calculate their rankings based on the four remaining categories we come up with a almost completely different ranking:

Screen Shot 2017-10-26 at 11.06.02.png

As the picture shows, Denmark makes a giant leap towards the top landing on an overall 6th place. United States for instance drops two places. Denmark’s large levels of redistribution aside, Denmark has a very free economy, which perhaps is one reason it can afford so much redistribution in the first place.

The Fraser Institute describes what ‘the size of government’ measures in the following way:

Taken together, the four components of Area 1 measure the degree to which a country relies on personal choice and markets rather than government budgets and political decision-making.

Denmark obviously is one of the lowest ranking countries in this regard and a lot of the Danish population relies on the government in order to make a living. Such a large proportion of the population reliant on government for income means high and distortionary taxes, this means a smaller reward for extra economic activity and thus a smaller incentive to take on more work – resulting in a reduction in economic freedom. In addition, it is stated in the freedom index that an economy with a high politicisation of the redistribution of societal goods there typically tends to be a higher level of hostility towards immigration as well.

Just to give you a gist of how things are in Denmark: Overall, 2.1 million of the Danish population in one way or another get their income provided by the government. That means that for every 101 full time worker, there is 100 people who get government benefits. How will they react when a massive influx of immigrants happen? Because of the misperception that immigrants pose a threat by going on welfare, they will consider them as free riders who don’t contribute to the public purse which ultimately leads to welfare chauvinism.

This leads to several consequences of which I will mention a couple. First of all, immigrants have been shown to be beneficial for low-skilled workers and it could therefore lead those people to be worse off than they potentially could have been with immigrants coming to the country. Additionally, welfare chauvinism, among other things, has in Denmark led the anti-immigrant party, the Danish People’s Party, to gain 21.1 percent of the vote and thereby become the second biggest party in Denmark. Because of the way the Danish system works, their massive influence have made it difficult for the current liberal-conservative government to actually get through with some of their liberal reforms trying to cut spending in the public sector as well as lowering the marginal tax and taxes in general.

Denmark is indeed in many ways great, but we should be careful glorifying it, especially if we do it based on false information.

Cracking down on Craigslist put sex workers at risk

When I lived in the U.S. last year, I appeared on Al-Jazeera to criticize the U.S. government’s repeated attacks on Backpage.com—a classified ads site that also featured postings for erotic services. In January 2017, it shut down its adult section following years of intense government pressure, including a Sheriff threatening credit card companies providing services to Backpage and Congressional hearings. While opponents of the site erroneously argued that it facilitated child sex trafficking, internet freedom groups, several libertarian organizations and some anti-trafficking advocates united with sex workers to condemn the government’s bullying of Backpage.

Defenders of the site argued that the shutdown made sex workers less safe, created a chilling effect on free expression, and undermined anti-trafficking efforts by removing Backpage as a valuable resource for law enforcement. A working paper published last month by researchers at Baylor and West Virginia universities provides new evidence that classified ad sites like Backpage do indeed play a significant role in reducing violence against women—especially female sex workers.

The paper—authored by Scott Cunningham, Gregory DeAngelo, and John Tripp—focuses on Craigslist: a similar platform to Backpage that included an ‘Adult’ ads section in the U.S. from 2002 until 2010, when it was also shut down due to mounting pressure from the government. By analyzing female homicide rates over time in U.S. cities after Craigslist introduced an ‘Erotic Services’ (ERS) section and comparing them to cities without such a section at the time, the researchers were able to estimate the effect of an ERS section on women’s safety. They found that cities that got ERS saw their female homicide trend slide afterwards, averaging out to a rate 17.4% lower than control cities over the same period.

They argue that the introduction of an ERS section was effectively random from the perspective of Craigslist: in some places ERS was added long after Craigslist launched there and in others it was included at launch, it was unpublicised, and female violence was on similar trends in ERS and non-ERS cities before launch. Thus they judge that these drops are likely down to Craigslist and not other unobserved factors.

Why might this be the case? One explanation is that adult sections of sites like Craigslist and Backpage make it easier for sex workers to find clients online while working indoors, prompting a shift from more dangerous street-based sex work to indoor alternatives. Working indoors allows sex workers to screen their clients more thoroughly, and soliciting online “may have led to greater deterrence of client violence through the creation of a digital fingerprint that made detection of criminal offenses more likely”.

Another possibility is that Craigslist’s ERS section gave sex workers a viable alternative to working with potentially violent managers. The study provides evidence to support the claim that sex workers transitioned from agency work to independent work due to the introduction of a Craigslist ERS section:

Our second dataset utilizes reviews from The Erotic Review, which is a reputation website (similar to Yelp.com), and one of the largest prostitution websites in the United States (Cunningham and Kendall, 2016). Clients use The Erotic Review to share detailed reviews of prostitutes. We use these data to measure whether a prostitute worked for an agency or independently…In the first 10 months [after ERS section introduction], the probability a prostitute was independent rose 6.5 percent, which is 12 percent of the mean. This effect persisted in the long run, as evidenced by the positive and statistically significant 10+ month coefficient.

A potential challenge to the study’s headline figure (a 17.4% reduction in female homicides) is that it seems “to exceed the number of prostitute deaths by several orders of magnitude”. However, this could be due to a significant underestimate of the share of female homicides attributable to prostitution. The data in this area is extremely sparse. The paper references a 2006 study on a small number of cities that estimates “between the years 1981 and 2002, 2.7 percent of all female homicide victims in the United States were attributed to prostitution”. This is likely to be an extremely conservative estimate; the illegality of prostitution means that at the time of data collection, U.S. law enforcement are often unaware of whether female homicide victims were sex workers.

With a misguided online porn crackdown looming in the UK, there are legitimate worries that future governments will also adopt a more American approach to websites hosting adult ads. If that happens, at least this study has provided economic evidence to support what sex workers have been arguing for years—that online platforms like Craigslist and Backpage help make women safer.

More markets in the NHS - rent operating rooms to surgeons

Apparently the NHS is inefficient in its use of capital assets. That's simple enough, we know how to solve this problem, we charge the people who use the capital assets for their use - introduce, that is, more marketisation to the NHS:

Hospitals could carry out 750 more routine operations a day if schedules were better organised, according to the finance watchdog.

The average surgery list wasted two hours a day last year, enough time to accommodate another 280,000 operations, according to an analysis by NHS Improvement. Surgeons questioned the figures, insisting that the main cause of cancelled operations was over-full wards.

It's even possible that the surgeons are correct here but that doesn't matter, charging them for the use of the operating theatres is still a good idea.

We have a scarce resource, operating theatre time. We wish to maximise the efficiency with which that resource is used. The answer is to charge people for using it.

This is not, of course, to say that Mr. Smith the ENT surgeon has to pay from his pocket for the use. Rather, we conduct an accounting exercise - as we already do in two other areas facing the same problem.

There's a limit to the amount of spectrum available in the country. That's why we get to bleed the mobile phone companies for what they use. But we're also going to, quite obviously, insist that MoD has access to some of that scarce spectrum. It's possible to simply assign what is asked for and forget it. But we don't - we charge MoD something like market rates on what they say they need. Purely on paper of course, the amount that goes into the MoD budget has to then cover the notional amount they pay back for the spectrum. But it does all concentrate minds wonderfully as to how much they should be demanding they have access to.

Equally with the roads. Yes, people do have to dig up the roads to stick pipes and cables in. So too do roads have to be closed to repair them. We charge people for that. Even when it's us taxpayers paying for a road to be redone, we charge a rent on the road to the contractor for the closure. Again, we taxpayers have to give them more money for the contract, money we then get back in that rent they pay for the road's closure. But that daily fee is set at the start, the number of days we expect being in the budget. It's amazing how much lower are delays  on works completion once the contractor has to pay extra rent for each day of closure over what is budgeted for and in the contract.

It is entirely moving money around on paper. But even that works to optimise the use of scarce resources. So, if operating theatres are being inefficiently used then impose the same system on the NHS.

Why not? We know it works after all.

To strengthen the Commonwealth and neoliberalism, I’m creating a new charity

Even in its birthplace the UK, the Commonwealth of Nations is not well appreciated. A 2012 British Government report found that, out of 100 senior influencers from media, parliament, the law and the civil service, only 25 correctly identified the Commonwealth when asked the question below. Have a read and see if you’d have picked it:

“If there was a single non-political, non-sovereign organisation, which represented almost a third of the world’s population with the stated aim of promoting democracy, human rights, good governance, the rule of law, individual liberty, egalitarianism, free trade, multilateralism and world peace would you expect Britain to belong to it? Are you aware of any body that does this? – can you name one?”

How could we raise appreciation of the Commonwealth and better spread its values? In my last blog post, I discussed one way to do this, share policy experiences between societies within it. I propose creating a charity to do just that: to promote in Britain exchanges with citizens of other Commonwealth nations that involve experience sharing. The Commonwealth has already agreed a group of values important to it, the 16 items like democracy and human rights on the Commonwealth Charter. My charity will share experiences of policies that affect these values.

However, the Charter is like motherhood and apple pie: anyone might say a policy affects the values on it. To improve the quality of experience sharing, my charity will likely need to partner with think tanks and other British organisations, as it holds exchanges. It could also focus on sharing that’s credible because it involves governments changing their policies. Finally, to keep my charity focused on sharing between societies, rather than between governments, I hope to make it independent of formal Commonwealth organisations.

But wait, you say, the Commonwealth is not a neoliberal organisation. How could my charity help spread neoliberalism within it? Well, one of the values on the Commonwealth Charter is Good Governance, a term in the development industry that has its own Wikipedia page. Neoliberal's should have faith that the policies they prefer are generally the better way to run things. Very regularly, it will be neoliberal policies that involve good governance.

I can summarise my idea for a charity: Via an event partnered with say the Adam Smith Institute, would Britain and the Commonwealth benefit from people hearing about New Zealand’s efforts that almost created a ground-breaking system for recreational drugs to get official approval and be sold legally? Via an event partnered with a British legal organisation, would Britain and the Commonwealth benefit from people hearing about Sri Lankan lawyers’ attempts to safeguard the rule of law from government actions that undermine it?

If you agree with me about the potential benefits of such a charity, please get in touch. I welcome any contact, especially that you support what I’m looking to do or even that you’re keen to assist. At this early stage, you could make all the difference. Email me now!

Amazon as an example of how markets really work

A useful example of how this market economy thing really works from Amazon. No, not the standard cries about incipient monopolies, killing off Mom and Pop stores, driving up emissions with delivery vans and all the rest of it. Rather, the actual and real effects of competition in a market economy.

Amazon has received 238 proposals from cities and regions across North America vying to host the company’s second headquarters, it said on Monday.

As we know, Amazon's looking to build a second HQ. The effects of the current one on the Seattle economy are such that better to do the amoeba thing and split off the expansion into a separate unit, elsewhere. Well, OK:

Some said this month they could offer Amazon billions of dollars in tax breaks if they were chosen. New Jersey proposed $7 billion in potential credits against state and city taxes if Amazon locates in Newark and sticks to hiring commitments, for instance.

At which point we can see the effect of this market competition in an economy. Here, rather than that monolith of retail power of some nightmares, the company is the consumer. Just as much as if it is you or me going out to buy an apple (no, apple, not Apple). There are myriad suppliers of apples, myriad places to put an Amazon second HQ. So, who is it that benefits from this competition?

It's us the consumers, isn't it? Potential locations are falling over themselves to gain that business of a second office. Their margins on doing so are going to be slim, if they even exist at all, given the other 237 vying for the location. This is also why farmers don't make much profit growing apples for us.

This is also what underlies William Nordhaus' great paper on entrepreneurial, Schumpeterian, profits. Of the value created by exciting new things some 3% sticks with those doing the creating. Near all the rest flows through to us as the consumer surplus.

This is why market economies work. The very competition they involve means that near all the gains flow to us, the consumers. We get fat and rich off the efforts of others to enrich themselves. Ain't that great? 

Alan Milburn's just made the argument for markets inside the NHS

This isn't quite where we'd expect this point to be coming from but it does make the case for markets in the NHS all the same. From Alan Milburn:

Technology and innovation are key to saving the NHS

Yes, OK then:

The reason is simple: the challenges facing healthcare today are different from yesterday. Perhaps more importantly, the opportunities for healthcare to do more will make them different still tomorrow.In the public debate about the NHS, the talk is much more of daunting challenges than opportunities. A sense of possibility is missing. Yet the world is on the verge of a huge leap forward in healthcare, driven by advances in knowledge and technology.

...

All these big changes are under way. They will accelerate in the years to come. The question policymakers should focus on is how to harness them to improve the health of the nation. That will mean making big changes to the NHS, not just putting in more cash.

We agree entirely. And then we play our party pooper trick which is to point out that we know very well what it is that fosters innovation and the use of technological advance.

No, this is not the argument about who invents something - we're quite happy to agree along with William Baumol that governments can achieve that. But we also insist, along with Baumol, that innovation, the working out what to do with the new inventions, is something that markets achieve and planned systems do not. For, of course, working out what to do with some new invention is trial and error. Well, what could be done with it? What, in reality, does it achieve? And which of those things do we want to have done? It is markets which process through all of these options iteration by iteration, planning does not.

Thus, the greater the coming wave of medical invention the more we need markets in the NHS to foster the innovation. Not that we quite expect Alan Milburn to be saying that but he should be.