Economic Nonsense: 21. Inheritance tax is needed to prevent some having an unfair start in life

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This question carries the assumption that life is some sort of race in which we are all struggling to outdo everyone else. Life is not like that. We are not racing against others because we all have different characters and different goals. There is a different finish line for each of us. Even the pace at which we choose to pursue our goals varies with the character of individuals. One widely-held aim of parents is to give their children a decent life, even a better life than they had themselves. Many put effort into achieving this; it seems to be a natural and widespread aim. When society prevents them from passing on their assets to their children after death, they often find other ways of achieving that aim. This can take the form of using influence to place their children in comfortable jobs. It can be done by transferring the assets while they are still alive. It can lead people to set up complex trust schemes beyond the reach of the taxman.

Inheritance Tax is taxing money that has already been taxed when it was earned. The provision parents worked to make for their children, paying tax as they did so, is now taxed again, removing part of their incentive to create wealth in the process. For many recipients, the bequest comes as a lump sum when they are already established and probably own their home. It is thus available for investment or to start a business. Taxing it greatly reduces these possibilities. The capital pools built up by a family business such as a shop, for example, can be dissipated on death by Inheritance Tax, with a consequent economic loss to society, a loss that impacts employees and customers.

People are not equal and cannot be made so. They are differently talented. Some are genetically equipped to develop athletic prowess if they work at it. For others it might be music or mathematics. The notion that 'fairness' requires they should all have equal chances sits ill with what life is actually like. We should not be trying to impose an equality that does not fit, but on extending to everyone the opportunity to better their lives.

No, John is not responsible for gender gaps

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Gender baiting has launched again in the United States, but this time it’s personal. Quite literally – the oppressors’ names are John. From The New York Times:

Fewer large companies are run by women than by men named John, a sure indicator that the glass ceiling remains firmly in place in corporate America.

Among chief executives of S.&P. 1500 firms, for each woman, there are four men named John, Robert, William or James. We’re calling this ratio the Glass Ceiling Index, and an index value above one means that Jims, Bobs, Jacks and Bills — combined — outnumber the total number of women, including every women’s name, from Abby to Zara. Thus we score chief executive officers of large firms as having an index score of 4.0.

The NYT didn’t stop there; the article goes on to use its new Glass Ceiling Index to compare political successes, too:

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I have to hand it to the NYT - this is an excellent propaganda piece. Determining the success and advancement of women in their careers to how those numbers compare to men named John, Robert, James, and William gives you some pretty damning results.

Left-leaner’s will find any opportunity they can to blame the sexism and discrimination that is still rooted on our society on employers and business culture; that way they can legislate quotas and pay structures across the board, and at least create the illusion, through force, that equality exists.

But evidence, even from the NYT's own sources, suggests that employers are not the problem.

The NYT's report was “inspired by a recent Ernst & Young report, which computed analogous numbers for board directors…for every one woman, there were 1.03 Jameses, Roberts, Johns and Williams — combined — serving on the boards of S.&P. 1500 companies.”

Lets look at that report a bit closer. It is the case that the number of male directors at S&P 1500 companies is hugely disproportionate to the number of female directors (84%/16%), but there is also evidence that the tide is changing. The graph below details that while far more men hold directorships, they also tend to be significantly older in age; 49% of female directors at these companies are under the age of 60 (compared to only 33%) of men, and 31% of male directors are over the age of 68 (compared to only 11% of women).

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Like many other occupations, a lot of perceived gender gaps are going through transitional periods; as women become more educated than men, we start to see changes in occupation breakdowns (but it’s not in the interest of gender-baiters to report it).

My colleague Ben has recently blogged on a paper that found if you control for a person’s background and length of time in the work force, “being female increases the chance of becoming CEO. Hence, the unconditional gender pay gap and job-rank differences are primarily attributable to female executives exiting at higher rates than men in an occupation where survival is rewarded with promotion and higher compensation.”

It’s not employers and it’s not corporate culture that’s holding women back; the reality is that women are making different choices than men. Many of them have to do with family planning, but many of them come down to different goals and ambitions.

Examples include both political and career ambitions. Women and men “win elections at equal rates, raise comparable amounts of money, and receive similar media attention” yet very few women are wanting or willing to run for pubic office. Research conducted in 2012 found that millennial women "just aren't very interested in being the top executives of high-profile companies." Of all the women aged 22-33 polled, only 15% actively wanted to lead a large, prominent business one day.

The NYT can use the Johns and Jameses of the world to paint political and market systems as sexist all they want, but their provocative Index completely misses the point. Women are choosing not to take their careers as far as they can go. And that's okay - if that choice makes them happy and gives them opportunity to peruse other meaningful things. But the real glass ceiling for women is being held up society at large, which often compels women from a young age to make different decisions than men.

Are women being educated about their career options properly? Do they feel supported to have kids (or not have kids) on their own terms? These are the issues that are really holding women back. If we actually want to address gender gaps in the work place, let's let John get on with his job while we tackle our deeply entrenched, and often bias, cultural norms.

How we wish for financial literacy amongst the commentariat

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From a certain Ms. Orr:

The government is thrilled that it has found a buyer for the Treasury’s 40% stake in Eurostar. And no wonder. An Anglo-Canadian consortium has offered to pay £757m. In the autumn of 2013, when the coalition first announced its plan to sell, it expected to raise £300m. Which looks like prima facie evidence that the government doesn’t have much idea about how valuable national assets are. It’s all, says the chancellor, George Osborne, “part of our long-term plan to secure Britain’s future.” To an idiot such as myself, it looks like part of a long-term plan to secure the future of Patina Rail LLP. ... But in the long term, selling off state-owned, profit-making assets can only ever make the government all the more dependent on tax revenues. As ever, profit gets privatised and risk or liability remains the business of the state.....Osborne has said that this money will in part be invested in infrastructure. Great. When that money has been spent on some infrastructure, when the risk is over and the profits are starting to flow, that in turn can be sold to the private sector,....

Well, yes.

What seems to be missing from Ms. Orr's understanding is that the £750 million the government will receive is the net present value of all future profits that are expected to be made by the line. In fact, looking at 2014 profits, it looks like some 35 times annual profits or so on that 40% stake. Which is a very fine price indeed to achieve.

Now, we're not really fans of the government building or running railway lines but let us suppose that you are. You also note that government can borrow cheaply, has the ability to pass laws over rights of way and so on. It is thus cheaper for government to take that early risk in the planning and set up of a new line. Once the line is up and running then the multiple of future profits which it is worth is very much higher than it was at the beginning, when there were still risks as to whether it would be finished, find a customer base and so on.

So, government invests at, say, a multiple of 10x future profits, brings the project to fruition and then sells it at 35x future profits. This looks like a very profitable indeed deployment of the government's special privileges over financing and the law.

That is, the sale of such a project once completed is an excellent idea.

Now, we all know why this doesn't happen in general. Government ends up investing in projects for political, not economic reasons. Cost management on public contracts is ghastly and they are therefore always over budget (I am told that the last one to come in under time and under budget was Polaris, which we bought lock, stock and barrel from the Americans).

However, this doesn't change the fact that if as and when government actually does manage to produce a profit making enterprise then it really should sell it. For that's the best way to capitalise upon those special attributes that government has.

By the way, it's worth noting that this stake was sold at something like 35 times last year's attributable profit. Not 35 times the income, whatever that lower number will be, from holding the stake. It's thus a very good deal indeed.

But our wish here is that the commentariat would actually understand the financial basics here. The capital sum you sell for is the net present value of all future profits. We're simply swapping money today for money in the future, that's all.

Economic Nonsense: 20. Only government intervention can address the gender pay gap

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There was a gender pay gap when the work required physical strength. This is because men are, on average, physically stronger than women. They are more capable of hauling a plough or heaving a sack of coal. When work meant physical labour for the most part, men were economically worth more. They were not intrinsically worth more, it was just that, on average, their labour could add more value than that of a woman. They were paid higher wages because of this. As physical labour has been made easier by machines, and desk jobs and service industries have become more significant employers than heavy industry, the labour of women has been more equal to that of men, and their pay has risen accordingly. In Britain today there is no significant gender pay gap. Women in their 20s earn a little more than their male counterparts.

There is a pay gap as they grow older, but this is a maternity pay gap, not a gender pay gap. Women who take time out of their careers to have and raise children earn less over the years than those who do not. This is for most of them an option they have chosen to exercise. Most do it because they want to, trading the higher salary that might otherwise result for the greater satisfaction and happiness engendered by starting a family. As they take time out of work, they mount the promotion ladder more slowly than their counterparts who make uninterrupted progress.

It is very important when looking at the statistics on this to compare like with like, that is to compare full-time employment with full-time employment. Some women prefer part time jobs because they offer better opportunities to achieve the balance between work and family that they seek. Part time jobs tend to pay less than full time employment, creating the erroneous impression that women are being paid less for the same type of work and the same amount of it. They have chosen a lifestyle that pays less because they prefer to have children be a part of it.

Who rules Britain: how much of our law comes from Brussels?

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Business for Britain was right, on 2nd March, to question the proportion of our laws that comes from Brussels. Nigel Farage says it is 78%, Nick Clegg 7% and the House of Commons Library 13.2% but that is also an understatement due to the Library’s omission of no less than 49,699 EU Regulations, during the same 21 years to 2014. EU Regulations are not approved by Parliament and thereby escape the Library’s attention. From that, Business for Britain concluded that 65.7% of our legislation comes from Brussels. The figures, in fact, get murkier because the Library also seems to have omitted up to 2,000 statutory instruments a year, which would offset most of the swing. SIs are the UK equivalents of EU regulations: both are secondary or “delegated” legislation and cover a broad range of rules from laws in the full sense to temporary road closures. SIs can even be used to repeal primary legislation.

The proportion from Brussels is really beside the point, namely the total number of rules both from Brussels and Whitehall. Governments claim they will staunch the flow but little is done. Surely by now we must have enough laws?

Curiously, so far as business regulation is concerned, Whitehall is the bigger offender. In 1972 we signed up to a Common Market. That is the one bit of the EU we all like and let us hope that, and not much else, survives the EU renegotiation. A single market must have a single set of rules governing that market. You cannot have a single market if everyone makes their own. The market-maker is the EU and it is no more a loss of sovereignty to conform to their rules than, say, playing by the club’s rules when one joins a poker club. Sovereignty is being able to opt out.

Business, like poker, is competitive so it is crazy to add ones own rules, hobbling one’s own business, to those required by the club. Telling the others at the table that you will never raise on, say, two pairs, stacks the odds against you. For this reason, counter-intuitively, it would be best if 100% of business regulation came from Brussels.

If a regulation is needed in the UK then we should ensure Brussels adopts it for the rest of the single market. If the others think it is unnecessary, we should think again. Rather than dreaming up its own business regulations, Whitehall should be staunching the 4,000 a year flow from Brussels and ensure that what does get through will deliver the open, fair and competitive single market we need.

Not only can we ditch all UK business regulations not required by the EU, but, with all that new free time at their disposal, our civil servants can be out and about in the capitals of Europe developing best practice, closer working relationships and, in consequence the simplest and best set of rules. In this game, fewer is better as anyone who witnessed the FSA contribution to the banking crisis can testify. Indeed, they will not need desk space in Whitehall, probably the most expensive in Europe, any longer.

There is little truth in widespread view that we must accept EU legislation without demur, beyond fine tuning directive-based legislation a bit. The European Scrutiny Committee of MPs “assesses the legal/political importance of EU documents, deciding which are debated, monitoring the activities of UK Ministers in the Council and keeping developments in the EU under review.” In other words, it is supposed to be briefed with EU Regulations in draft and seek to amend those not in the UK interest. How often does it do that? Hardly ever is probably a generous estimate. When that doughty EU fighter, Sir William Cash, became chairman, some of us hoped for action, but no, he was overcome by the same torpor as overwhelmed his predecessors.

In short, Business for Britain are right to complaint about the excess of regulation from Brussels but we should complain even louder about the excess from Whitehall and Parliament’s spineless defence of British business.

Adam Smith: also right about watches

In Book One of the Wealth of Nations, Adam Smith writes:

The diminution of price has . . . been most remarkable in those manufactures of which the materials are the coarse metals. A better movement of a watch, that about the middle of the last century could have been bought for twenty pounds, may now perhaps be had for twenty shillings.

He is looking at a particular industry to verify his claim that there had been sustained productivity movements over time. And it also functions as a nice argument in two economic history debates: whether sustained productivity improvements came first with the Industrial Revolution; and whether productivity was centred around a few key industries (coal, cotton) or was a more general phenom.

A new paper from Morgan Kelly and Cormac Ó Gráda, entitled "Adam Smith, Watch Prices, and the Industrial Revolution" (pdf) looks into the values people gave to the police when their watches were stolen, and finds that prices trended down steadily, consistent with rising productivity. Indeed, assuming quality trended up too, the numbers they get are pretty close to Smith's.

To test whether watch prices had been falling steadily and steeply since the late seventeenth century we use the records of over 3,200 criminal trials at the Old Bailey court in London from 1685 to 1810. Owners of stolen goods gave the value of the items they had lost, and, because watches were frequently stolen, we can reliably track how their value changed through time.

Contemporaries divided watches into two categories, utilitarian silver or metal watches; and more expensive gold ones. Adjusting for inflation, the price of each type of watch falls steadily by 1.3 per cent per year, equivalent to a fall of 75 per cent over a century.

If we assume modest rises in the quality in silver watches, so that a watch at the 75th percentile in the 1710s was equivalent to one of median quality in the 1770s, we find an annual fall in real prices of 2 per cent or 87 per cent over a century, not far from what Adam Smith suggests.

Most of the cost of a silver watch was the labour involved in cutting, filing and assembling the parts, so we can gauge the rise of labour productivity in watch making by comparing how the price of a watch fell relative to nominal wages. During the period 1680–1810 real wages were roughly constant so this rise in labour productivity is similar to the fall in real prices of watches.

I find the whole area very interesting and fruitful. And, as ever, it's nice to see Smith's educated conjectures backed up by hard data.

RIP Matthew Young

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We are very sad to report the death of our friend Matthew Young, who died suddenly at the weekend following an undiagnosed illness. He worked on major projects for the Adam Smith Institute, but also had a significant career in government, under both Labour and Conservative administrations.

Matthew rose quickly through Whitehall to become Private Secretary to Lord Armstrong, head of the civil service under the Conservative Prime Minister Edward Heath, in 1971. He went on to be Press Secretary to the Labour Prime Ministers Harold Wilson and James Callaghan, conducting twice daily Lobby briefings in Downing Street and preparing instant responses to the numerous political issues that arose.

From 1976 he became responsible for policies to control and reduce costs in the civil service, with direct responsibility for controlling expenditure limits on government departments. During this time he exposed some of the profligate spending in ministries – such as the Ministry of Defence, which he found was still issuing detailed specifications on headlight seals for their trucks, long after this technology had been replaced by cheaper, more reliable one-piece headlight manufacture.

In the Thatcher years, Matthew worked on privatisation, drafting plans to privatise HMSO, the Laboratory of the Government Chemist, the Building Research Establishment and the Agricultural Development Advisory Service. He also pushed forward the contracting-out of Defence functions such as Navy Air Training, Radio Communications, and Met Office observation functions. He estimated that these activities amounted to more than £300m of savings for the taxpayer.

In the 1990s he directed major projects for the Adam Smith Institute, involving key players from industry, government and the civil service. One of these, the Trafficflow Project, identified the potential for road congestion pricing in the UK, and convinced the then Mayor of London, Ken Livingstone, to adopt it. Another, involving national pension and finance experts, laid out plans for a simplified pension system, which was the foundation for the Stakeholder Pension introduced soon after.

From 1996, Matthew created his own think-tank, Public Policy Projects, concentrating mainly on health policy. Hundreds of key players from private and public sectors would attend his events and Parliamentary Breakfasts, to hear an impressive array of ministers and experts talking about current concerns.

The Adam Smith Institute has lost a good and loyal friend, and someone who not only thought deeply about the structure of government, but actually made change happen.

President Cameron and the TV debates

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David Cameron's decision on the TV debates was one of the worst of his life. No, not yesterday's 'final offer' to the broadcasters of only one 90-minute debate with seven (or eight) parties represented, and held well before the start of the 'short campaign' prior to the General Election of 7 May. Rather, it was his decision to push for TV debates five years ago, when he was Leader of the Opposition, that caused the damage. In purely 'political' terms, that decision quickly back to bite him. It gave an opportunity to the Liberal Democrat leader, Nick Clegg, to come forward as the 'Anti-Westminster' candidate, boosting that party's standing and forcing the Conservatives into coalition.

TV debates of course always help the underdog and damage the government. So now that Cameron is Prime Minister, he is facing the same calls for debates from Labour and the smaller parties, and is having to take the same criticism he launched at PM Gordon Brown last time, that he is 'frit' of defending his record.

But there are two, more fundamental problems. The first is that there is no logical way to decide which parties should be represented in TV debates. The debates are, after all, seen as a 'national event', rather than some throw-away entertainment, so it is important that they should be fairly structured. But it is impossible to include all of the dozens of parties, including pop-up parties, who contest seats in the General Election. So where does one draw the line? The Liberal Democrats may be sharing power, but they are polling little better than the Greens. UKIP has come from almost nowhere, but now out-poll the Liberal Democrats, so should they be included at the expense of the LibDems? And the Democratic Unionist Party (and Sinn Fein for that matter) may well stand only in Northern Ireland, but they are key forces there, so should they be on the platform too?

There simply is no objective way to decide. And no answer is going to suit every party. (And it is for this same reason that taxpayer funding of political parties can never work either – unless the two biggest parties simply divide the funding up between them and resist any claims from 'upstarts').

The most serious problem, though, is a constitutional issue. Britain's governmental system is not supposed to be a Presidential one. True, the Prime Minister has many of the powers that a US President has, powers that once belonged to the monarch (like initiating wars and signing treaties, without troubling Parliament overmuch). But the Prime Minister is not just an executive, but still a member of the legislature - a Member of Parliament. When British voters go to the polls, they are supposed to be electing their local MP - someone who will actually hold the government to account. They might take into account what that might mean in terms of who moves in to 10 Downing Street, but in all but one constituency, that is not who they are electing.

There is an argument that the executive in Britain has too much power, precisely because it also controls the legislature. Of 650 MPs, a hundred are on the payroll, a hundred would like to be, and two hundred on the other side are lining themselves up with the same in mind. So party leaders and offers have enormous power, and Parliament has very little restraint on them. Maybe we should be separating the executive and legislative branches. Certainly, the last thing we should be doing is deepening the power of the executive further. But this is precisely the effect of TV debates. They focus attention on just one person, boosting centralism and central power. That is not healthy for any nation. Frankly, there should be no TV debates at all.

Caution: This Car is a Consequentialist

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The Technology expo Mobile World Congress was held this week, and amongst shiny new phones and gadgets, a number of reveals pertained to the future of motoring. Across the board firms are leading with the idea of interconnected devices and the ‘Internet of Things’, and the automobile industry is no different. AT&T showed how to control a ‘smart home’ from your ‘connected car’, whilst Visa wants us to use our wheels to order pizza. Tech and automobile companies are converging and partnering, with both Apple and Google racing ahead to provide dashboard operating systems. Of course, Google’s most distinctive contribution to motoring so far is still its cartoon-like driverless cars; a potentially transformative sector other companies are piling into.

This week Renault Nissan announced plans to bring an autonomous, connected car to market by 2016. This wouldn’t be as far down the line as a fully driverless car, capable only (pending regulatory approval) of driving autonomously in traffic jams. Whilst Renault Nissan’s head predicted that autonomous motorway travel is not far off, moving beyond that point is far more difficult because we simply can't currently ensure that autonomous vehicles make rational decisions in an emergency.

Questions of which emergency choices would be rational, and which, indeed, would be most ethical to take are some of the most interesting in the pursuit of automated transport. Such cases bear a strong resemblance to the classic Trolley Problem thought experiment:

There is a runaway trolley barreling down the railway tracks. Ahead, on the tracks, there are five people tied up and unable to move. The trolley is headed straight for them. You are standing some distance off in the train yard, next to a lever. If you pull this lever, the trolley will switch to a different set of tracks. However, you notice that there is one person on the side track. You have two options: 1) Do nothing, and the trolley kills the five people on the main track. 2) Pull the lever, diverting the trolley onto the side track where it will kill one person. Which is the correct choice?

In philosophy this problem (along with permutations involving fat men being shoved off bridges and looping tracks) is used to tease out consequentialist v. deontological intuitions — should you always act to save the many, or is it wrong to treat people as a means to and end? — as well as moral distinctions between forseeing and intending a death, and killing and letting die.

The ethics of driverless cars in this sense are particularly juicy. Unlucky drivers may experience their own trolley-like problems: should they swerve into the next lane or aim instead for the pavement? Generally, though, we’re pretty forgiving of a bad call made in a split second and under extreme duress, and wouldn’t really consider a particular choice an ‘ethical’ one.

However, what driverless cars do in a dangerous situation will be thought far more significant. Even if cars ‘learn’ with road time and experience, their instinctive behaviour will already be premeditated and decided; written in as part of the car’s program and consciously chosen by a coder.

This predetermination of the car’s behavior (and by extension, its moral philosophy) makes trolley-related problems both an ethical and legal minefield. Regardless (or perhaps, because,) of how effective driverless cars may be in reducing overall accidents, lawsuits are likely to be significant, and expensive. Whether or not a car is automated to minimize total casualties or programmed to never hit an innocent bystander, there will likely come a time when someone asks ‘why was my loved one already marked out to die in this situation?’ Applying different moral codes will inevitably lead to very different ideas of what it is acceptable for a driverless car to do.

Picking the ‘right’ ethical choice in a range of hypothetical situations will therefore be important, especially if the deployment of driverless cars relies on political and populist goodwill. There’s no end of considerations — is a forseen death acceptable? Is a child’s life more valuable than an adult’s? How do the number and ages of individuals weigh against one another? Should a driverless car prioritize the safety of its passengers over pedestrians, or should it try to minimize third party harm? Should public and private vehicles act differently? Ultimately it may be governments who insist on taking these decisions, but that doesn’t make them any easier.

There’s a number of interesting articles on this sort of thing, and  it will be interesting to hear futher development and discussion of these issues as driverless technology evolves. However, one solution to ‘choosing’ the right outcomes which I found interesting, posited by Owen Barder, would be to let the market decide and with each person to purchase a car programmed with their own moral philosophy. This may not work out in practice, but I do like the idea of a ‘Caution: This Car is a Consequentialist’ bumper sticker.

Decriminalising possession is not enough Mr. Clegg

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Decriminalising the possession of drugs is better than not decriminalising it. But we're sorry to say that it's not actually enough: it is also necessary to legalise the production and supply of them.

Nick Clegg will today press ahead with plans to decriminalise possession of all drugs – despite charities warning the move will wreck thousands of lives.

The Lib Dem leader is to pledge that his party will bring forward plans to ensure those caught with drugs for ‘personal use’ will no longer face criminal prosecution. Instead, the maximum penalty would be a fine.

The move covers the powerful ‘skunk’ strain of cannabis and hard drugs such as crack cocaine and heroin, as well as ‘soft’ drugs including marijuana and amphetamines.

Not jailing people for ingesting the stimulant of their choice is of course a good thing. If we don't own our own bodies and cannot decide what to put into them then we are not free. And freedom and liberty are the aim and goal, of course.

However, this is not enough, welcome though it is. For there are two problems with drugs. The first is that above, the issue of liberty. The second is the issue of safety. It's all very well to say that we may partake as we wish, subject only to fines. But only with the legalisation of manufacture and supply can there be any form of quality control.

It's worth thinking back to the adulteration of food in Victorian times. The first investigations into what was actually going into processed foods turned up in The Lancet in the late 1840s and early 1850s. And there was most certainly all sorts of very dodgy stuff being added to food. Sometimes knowingly and sometimes not: we seem to recall people using cadmium salts to make sweets look pretty which really isn't something to be recommmended but they didn't know that then.

Legislation to deal with such adulteration really only started in the 1870s. By which time the problem was largely solved. For the information about the adulteration led to producers creating brands which promised no such adulteration. And consumers bought them on such promises. It's not from quite the same time or place but this is akin to Heinz tomato soup conquering the world. Early canning of soups was slightly hit and miss. Heinz kept better control of that process than other competing manufacturers and thus killed fewer people. This became generally known, the brand became a marker of quality and global domination beckoned.

To solve our second problem with drugs we need to allow those same processes free rein. Brands must be allowed, brands that claim to be free of brick dust, to be of a certain purity and also of a certain dose. Tax the heck out of them as well, of course, but legalisation, not just decriminalisation, is the solution to both of our problems about drugs.