Oh well done, Labour decides that those with poor credit should not be allowed to borrow

This is not what they say they want to do of course, they are telling us that this will make credit cheaper for those who find it difficult to get. But the net effect will be to make something currently difficult and expensive into something impossible:

Credit card companies would be forced to write off billions of pounds in long-term customer debts if Labour got into power under a policy to be unveiled at the party's conference.

John McDonnell, the shadow chancellor, will propose capping the amount of money lenders can charge in interest so that no one has to pay back more than double what they borrowed.

He will say the policy will help three million credit card holders who are “trapped by their debt”.

As the Federal Reserve has pointed out over in the US interest rates, just like other prices, are not things we can just randomly assign at our whim. They're actually a bit more important than that:

Even though payday loan fees seem competitive, many reformers have advocated price caps. The Center for Responsible Lending (CRL), a nonprofit created by a credit union and a staunch foe of payday lending, has recommended capping annual rates at 36 percent “to spring the (debt) trap.” The CRL is technically correct, but only because a 36 percent cap eliminates payday loans altogether. If payday lenders earn normal profits when they charge $15 per $100 per two weeks, as the evidence suggests, they must surely lose money at $1.38 per $100 (equivalent to a 36 percent APR.) In fact, Pew Charitable Trusts (p. 20) notes that storefront payday lenders “are not found” in states with a 36 percent cap, and researcherstreat a 36 percent cap as an outright ban. In view of this, “36 percenters” may want to reconsider their position, unless of course their goal is to eliminate payday loans altogether. 

We would also point out that if this was applied to debt, rather than simply credit cards, then this would rule out mortgage interest rates rising above 5.5%. No, really, a 30 year repayment mortgage at 5.5 % pays back more than twice the sum borrowed.

Prices, even the price of money, aren't some random digits we can apply as we wish. They're actually the way the world works. Not that we expect John McDonnell to understand this but the rest of us should.


Against rural broadband

Society got very excited about the invention of the car. From the 1950s onwards especially, governments around the world began huge road-building projects, bulldozing swathes of cities for huge multi-lane dual carriageways. This frenzy has subsided, and it's largely clear how this ideological expansion reformed our cities for the worse.

Highways are a crucial part of a nation's infrastructure. Turnpikes—privately-funded and toll-financed roads—were, alongside the private waterways network, a key part of the earliest stages of England's industrialisation. Their high tolls—the rents earned by those who built them—were incentives for the creation and rapid expansion of the world's first, and for a long time the greatest, railway network. So much for natural monopolies: price competition was so vigorous that Mancunian workers and industrialists (and eventually the city corporation) funded a canal that made the city, 40 miles inland, the world's third biggest port.


But it's all too easy to go from thinking something is beneficial in particular contexts to thinking we should expand it indefinitely, even outside of that context. In post-war Britain, infrastructure investment was not driven by the profit motive—it was driven by a conviction that cars were the future. Birmingham is, of course, an especially prominent UK example of this. But it happened almost everywhere, and London was only just saved. The US midwest provides even more extreme examples. Of course, the more heavily roads and parking were subsidised, the more rapidly transit declined.


An insightful short newsletter, which I saw online like a blog post, applies this insight to broadband.

Our rampant enthusiasm for involving computers in everything reminded me of the last century's most important technological revolution, the automobile, which turned out differently than it began. Like computers today, cars were once so novel and promising that we "did the things that let us use cars" rather than the inverse.

That honeymoon period lasted long enough (and for some it hasn't ended yet) to entirely and permanently remake the infrastructure of cities, the most familiar example being the wave of support that enabled Robert Moses to slice New York apart with expressways. By the time the car's real problems became visible—traffic, pollution, physical danger, and social atomization—it was too late to reverse its complete dominance. Most of the rebuilding was already done.

Right now, we're building a digital infrastructure that rivals the physical one we built for cars, just as fast and with equally uncritical enthusiasm. If freeways prioritized cars at the expense of people, this prioritizes bits similarly, no less because we've all begged for it. Of course, it's still too early to say what the internet version of gridlock and global warming will turn out to be once its saturation of society is complete.

In the eyes of this author, it's Zuckerberg and Jobs we should be worrying about, but I'm not sure. See, like private road, rail, and waterways, Facebook and Apple have automatic feedback mechanisms that help guard against both overexuberance and underexploitation: profit. Yes, private firms make crazy decisions, but when they do they get wound down, automatically. They only stay alive, assuming a decent institutional framework, when they satisfy preferences. Uber's venture capitalist investors can only subsidise riders while they have money in the bank. Historically we can see that government-funded boondoggles have not faced this discipline.

So I'm sceptical about the clarion calls I hear absolutely everywhere that we should spend billions of pounds, or hundreds of billions around the world, building broadband because the internet is the "technology of the future". It probably is, but unless we have incredibly solid evidence that broadband has large net positive externalities, then we should let it roll out privately; when people are willing to pay how much it costs society to build. Real technologies of the future fund themselves.

We most certainly welcome this People's Trust Fund, oh yes we do

We think this is an absolutely wonderful idea, the People's Trust Fund. Not, we hasten to add, that we're saying anything at all about how you should invest. Rather, this is going to be the most wondrous test of what we are really pretty sure we know about markets, finance and investment.

As The Guardian says:

An investment fund that promises to break the mould of City short-termism and aims to make gains of 7% a year is to open for small investors able to put in as little as £500.

As they say in a little more detail themselves:

Nobody can be sure what our investment returns will be, but we believe that over a typical seven-year period, our strategy should be capable of turning £100 into £160 – that’s a total return of 7% a year compound, after costs, and assumes that inflation runs at 2% p.a. over the period.1

In terms of your spending power, this is the equivalent of 5% p.a., giving your £100 a value of around £140 after seven years, after inflation.

A 5% real return after costs? That is a remarkable offer. So, how are they to do this?

Well, firstly the investors own the company - so, it's like Vanguard in that sense, a mutual. Secondly, no cash bonuses for anyone, only shares in the fund itself- be interesting to see how the dilution works there. They'll accept investments as small as £500 or even £25 a month. Those logistical costs of management are going to be quite high.

Further good things:

 The People’s Trust will also aim to improve lives directly and immediately, by using a small proportion of the fund to lend to charities and community interest companies that have a direct social impact. This is not charity; we expect a modest return on these loans – but you’ll know this money is being used with the aim of doing good in society.

Deliberately lending at modest returns in order to produce a 5% real return.


The day-to-day money management will be done by five fund management groups, which will each be given a seven-year contract to ensure their performance horizon is the same as the underlying investors.

It's a fund of funds, meaning two sets of fund management costs.

The special magic sauce here is that it will be a long term investment fund. Eschewing all short term fads and fancies, along with making sure that everyone pays all their taxes and so on.

That is, an investment strategy that simply hasn't occurred to any of the other half a million people working in The City is, through that fee structure, charitable endeavour and tax insistence, going to deliver a 5% real return to investors.

That would indeed be most welcome - as we know, over the long term managed funds tend to underperform the basic indices precisely because of those management costs. And it would be welcome too, not least for the investors.

But also it would greatly inform the rest of us out here labouring as we do under that efficient markets hypothesis. That known information about prices is already in prices and therefore no one can consistently and long term outperform that market. Or rather, if someone does then they're very definitely a statistical outlier (Warren Buffett doesn't quite count here, his insurance float means that his cost of funds is rather below that of Treasuries, below everyone else's in the market).

This is going to be the most wonderful test of exactly that basic critique of the current investment markets. If it is true that short-termism damages investment returns then this fund has a chance of proving that. Our own supposition is that that's a simple enough idea that someone's had it before and tried it but still, we look forward to the disproof of our contention.

In which we entirely agree with John Harris of The Guardian

Something we entirely agree with:

No one, surely, is going to be able to roll back a social transformation that dates back to the era of Margaret Thatcher.

Excellent, now that we've got the issue of council housing out of the way we can move onto important matters:

Which takes us to the question posed by our presumptive next king-but-one, and the stupid tangle of legal and cultural conventions that get in the way of recognising what is happening, and doing something about it. Just as hardened heroin addicts are often killed by dealers who play fast and loose with their supply, so it is with scores of young ecstasy users. In other words, for as long we allow our young people to ingest chemicals cooked up in bathtubs by career criminals, with no means of checking what on earth they are about to swallow, tragedies will happen.

I am as unsure about the sweeping legalisation of drugs as Prince William appeared to be. God knows how you liberalise the supply of crack; the idea of powerful hallucinogens available from your local off-licence seems problematic to say the least. But the idea of decriminalising at least the possession of most drugs seems increasingly unanswerable – and in time, it is not hard to envisage the liberalisation of cannabis pioneered by a handful of US states extending to Britain, as well as ecstasy being legalised, made subject to official standards, and freely bought and sold.

We are not unsure. As Harris ably describes it is the very uncertainty of what is being ingested which causes the problems with what is being ingested. Even with heroin this is true - certainly, Shipman turned out to be a mass murderer but he was also an entirely functional one and also entirely functional GP for some decades while on good, pure, pharmaceutical grade stuff. 

We actively desire that suppliers be held responsible for the purity, consistency, of what they supply, just as in any other area of life. All of which means that it should be legal, so we can sue them, so that there is the incentive to create brands which are indeed consistent. 

It really is worth noting that the branding of food took off in the 1850s, largely solving the problems of adulteration rather before legislation upon this matter in the 1870s. Food that doesn't kill people gains market share against that which does. Drugs which don't kill people will equally so.

It may even be that drug taking is immoral, that it's a waste of a life, but whose life it it anyway? To be a liberal is to say that it is the life of the person living it. And we here are utilitarians, simply desiring what works best given that fallible material being worked with, human beings.

We're still not quite convinced that heroin should be sold in sweetie wraps so that 5 year olds can chase the dragon. But the closer that consenting adults get to being able to purchase known drugs, in known purities, with the standard consumer comebacks for failures on either part, then the fewer people will die from taking drugs - and, of course, the more people will be able to follow their desires.

And what else can drug policy be other than management at least damage of something that happens anyway?

How terribly amusing from the European Commission

There's a great deal of shouting from the European Union about the taxation of digital business. An insistence that really, such companies must be paying more tax where value is added. Which is, of course, how the system currently works. Most of he value is created in the US, given that's where all the programmers are, and that's where it gets taxed, under US rules. Really - profits cannot be paid out to shareholders until US profit taxes are paid.

This doesn't satisfy European politicians of course as they want to be able to spend that revenue. Thus the shouting. However, in the course of their reasoning they let slip something terribly fun, an agreement, an admission perhaps, that we shouldn't be taxing corporations at all:

In the field of taxation, policy makers are struggling to find solutions which would ensure fair and effective taxation as the digital transformation of the economy accelerates. There are weaknesses in the international tax rules as they were originally designed for "brick and mortar" businesses and have now become outdated. The current tax rules no longer fit the modern context where businesses rely heavily on hard-to-value intangible assets, data and automation, which facilitate online trading across borders with no physical presence. These issues are not confined to the digital economy and potentially impact all businesses. As a result, some businesses are present in some countries where they offer services to consumers and conclude contracts with them, taking full advantage of the infrastructure and rule of law institutions available while they are not considered present for tax purposes. This free rider position tilts the playing field in their favour compared to established businesses.

Not paying corporation tax is an advantage to those who don't pay it as against those who do. Which is what we've been saying about corporate and capital taxation all along. If you tax corporations then there will be less investment in them in your economy. This makes everyone poorer - the deadweight costs are high. This is indeed exactly the same reasoning which leads us to insisting, as a result of optimal tax theory, that we shouldn't be taxing the corporations at all.

Which is interesting, even amusing, don't you think? The EU's justification for why they just must tax companies is the very reason basic theory says we shouldn't be taxing corporations at all.

We're struggling to see what the problem is quite frankly

We're aware that we might not be quite in tune with the zeitgeist here but we do find it difficult to understand what is the problem here:

The ranks of Queen’s Counsel are the elite of the legal profession’s advocates. To take silk — so-called after the silk robes worn by the 10 per cent or so who attain the initials “QC” — is a passport to status and higher earnings. So who gets it, and how, matters.

Yet despite fundamental reform in 2005 to end the system’s reliance on judges’ comments and the lord chancellor’s decisions, women still do not put themselves forward in anything like the same numbers as men.

As it happens women seem to achieve this exalted rank in about the same proportion as they put themselves forward. The portion of newly appointed QCs that are female also seems to be about the same as the the portion of those lawyers of the appropriate seniority who are female.

We'd thus start with the idea that the appointment of QCs isn't a problem. As the analysis goes on, what is actually happening is that rather more of the women - than the men - who qualify to be lawyers don't progress in their careers to the point where they might be considered as QCs. Yes, obviously, family life and children.

That is, those who take the career breaks - or, as is mentioned, restrict their travel or activities for the same reason - to raise their children tend not to reach the upper reaches of the profession. We are really quite certain that the same would be true of men who took such breaks, restricted their activities in such a manner.  

Which is why we can't see what the problem is. Those who strive for the brass ring seem to have, whatever their gender (and the same seems to be true of ethnicity), the same opportunity to grasp it. Which is about what we would hope society did and does. People should indeed have the liberty, even the right, to organise their lives as they wish, to pursue their own goals. That's rather what being a liberal means and we're most definitely that, liberal.

That those who don't work nose to the grindstone for 20 years don't become QCs does not worry us. For the same reason that those who do not qualify as lawyers don't become QCs does not worry us. People make choices in life, they get to enjoy living as they wish. But, as ever, making one choice does rather preclude some other outcomes - opportunity costs do always exist of course.

The ASI at Tory Conference: cannabis, vaping, clubbing and winning over Millennials

Let's face it, Conservative Party Conference can get a bit stuffy. But that's definitely not the case when it comes to the ASI's conference fringe line-up. We're discussing issues that really matter on topics that are often neglected, but vitally important if you care about a free society.

We're hosting three events inside the secure zone (that means to attend you'll need a conference pass) over the Monday and Tuesday covering e-cigarettes, cannabis legalisation and winning over young voters with free market policies.

On the Monday we've got two panels. The first (at 1pm-2pm in the Stanley Suite at the Midland Hotel) will cover how innovation (and not nanny state regulation) has been the driving force behind millions quitting smoking, and what we can do to ensure that more people can benefit from innovations like e-cigarettes. Regulations from Brussels are threatening the harm reduction revolution, imposing silly rules on vape canister sizes and preventing vendors from fully informing customers that e-cigs are (at the very least) 95% than tobacco.

We've got a great panel for it. Media GP, Spectator Columnist and author Dr Roger Henderson will be speaking about the public health divide on harm reduction. Roger probably knows more about giving up smoking than anyone else, indeed he's been the face of NHS stop smoking campaigns. He'll be joined by Christopher Snowdon, who's work as Head of Lifestyle Economics should be known to every reader of the ASI blog. Chris is a fierce opponent of the nanny state and a strong critic of the EU's Tobacco Products Directive. He vapes. Representing the ASI will be Sam Bowman, our Executive Director. He's a big advocate of Sinnovation, the idea that innovations in vice products like heat-not-burn cigarettes could have massive benefits for public health and reach people who'll never sign on to a public health campaign. Also from the ASI will be our Director, Eamonn Butler who'll be chairing the panel. Given the sheer number of people who suffer from smoking-related illnesses and the massive prospects for e-cigs to dent that, this could be the most important discussion you will see at Tory conference. For more info, click here.

Sticking with the harm reduction theme, we've partnered once again with Volteface, Britain's best drug reform think tank on an event (4pm to 5pm - Central 3) entitled 'how to stamp out street cannabis'. We'll be talking about how cannabis legalisation can address the drug problems that Conservative voters really care about. Just as alcohol prohibition led to stronger booze, no ID checks and violent crime, so to does the legal fudge on cannabis. States in the US that have legalised cannabis have been able to regulate purity and strength, force sellers to check IDs, and tax it to pay for drug treatment. 

We've got a great panel to discuss what we can learn from the US and Canadian experience. Crispin Blunt MP (a former criminal justice minister) will be speaking. He's always worth listening to, especially since last year he declared his support for full drug legalisation at an ASI party conference event. His experience on the foreign affairs select committee gives him a unique perspective on the harms of cannabis prohibition. Joining Crispin will be Steve Moore who's the Director of Volteface. Steve's, one of the few drug reformers who really gets the need to win over and address the concerns of Conservatives as well as liberals. He's a true expert on drug policy. Rounding out the panel will be Sam Bowman, who's been leading the ASI's drug reform push. For more info, click here.

Cannabis and vaping lead in nicely to our third secure zone panel on Tuesday, 'The Millennial Manifesto: how to win over young voters' (4pm - 5pm - Central 3, ICC). Young voters opted for Corbyn's socialist agenda at an overwhelming rate. If the Tories are ever going to win another majority they'll need to have a message that appeals to young people. We've already chipped in to the debate with Dr Madsen Pirie's Millennial Manifesto grabbing headlines with policies that cut taxes, build houses and prioritise mental health. 

Our panel will tackle the issues that young voters care about and make the case that the Conservatives change to win over the young. Dr Madsen Pirie, President of the ASI will make the case for his Millennial policy agenda. Alongside Madsen, will be the ASI's former head of comms and current IEA News Editor, Kate Andrews. Our Head of Research Ben Southwood will be joining the fray making the case that bribes won't work and that the only real way to win over young people is to start building more houses. Grant Tucker, Diary Reporter for The Times will be chairing the panel. For more info, click here.

As well as our secure zone panels, we're doing an invite-only one outside the secure zone at a nearby music venue on Tuesday at 6pm (email samd@adamsmith.org if you want a place) on a new approach to 'preventing club drug deaths'. Clubbing may not be the first thing you think of when you hear the words Conservative Party Conference, but with the Conference returning to Manchester, a city that can claim ownership of clubbing culture like no other in the UK, it is a perfect fit for a debate on the opportunities and the threats to the industry.

We'll be discussing how to prevent club drug deaths and how innovative harm reduction solutions like The Loop's Multi Agency Safety Testing are having a real impact. Working with Volteface and The Night Time Industries' Association we've assembled an incredibly cool panel.

We've got Paul Staines (aka Guido Fawkes) chairing the panel, who before becoming the most feared voice in Westminster stood up against anti-rave regulations with the Freedom to Party campaign. We've got Volteface's Policy Director, Henry Fisher, who's heavily involved in The Loop's drug testing. Alan Miller, Director of the Night Time Industries Association will be making the case against excessive regulation of venues, and Sacha Lord Marchionne, founder of Parklife and The Warehouse Project (Manchester's superclub) will be talking about how venues can be a force for good by working with the police and groups like The Loop. If that wasn't enough, we've also got The Loop's Director Prof Fiona Measham joining us via videolink from New York.

It's sure to be a cracking couple of days.  If you'd like more info or to request a place at our club drugs event, then send an email to samd@adamsmith.org


Once again the NHS is evidence of Baumol's central contention

Or as we should put it, the NHS is evidence of both of Baumol's central contentions. The first is that one that many know, the Cost Disease. As technology marches on it is easier to increase productivity in manufacturing rather than services. But wage rates are set by average productivity across the economy thus services will rise in price as against manufactures over time. The NHS is largely a service and this then explains the NHS having an inflation rate above that of the general economy.

We're perfectly happy with that basic analysis by the way, we just don't think that it explains all of the NHS' higher inflation rate. However, here's the other of Baumol's major contentions coming into view:

Maternity wards have done ‘very little’ to prevent serious medical errors in the past 20 years, a damning report warns.

Babies are today just as likely to suffer brain damage as a result of blunders made by midwives and doctors as they were during the late 90s.

Midwives are failing to properly monitor heartbeats and junior doctors are attempting to perform complex deliveries with no previous experience.

The report by NHS Resolution – the health service’s legal body – examined 50 cases where the health service admitted liability for babies being born with cerebral palsy, a form of brain damage, between 2012 and 2016.

That other major contention being about invention and innovation, those things which lead to those increases in productivity in the first place. The two, the Cost Disease and the creation of innovation making up a unified whole. 

His observation being that governments and planned systems can do invention just as well a market and competitive systems. However, they are considerably worse at innovation, the gradual and continual refinement of processes so as to increase that productivity. Actually to the point that entirely planned systems, like say the Soviet Union, manage to make no, none, advance in such innovative productivity even while they can indeed invent satellites and so on.

Productivity here is clearly the amount of labour being used in maternity wards as against the number of children damaged by errors on those same wards. Fewer damaged would be an increase in productivity.

The point is not that the errors happen - no human based system is ever going to be free of those. Rather, that there has been no improvement in this planned system over the decades. Exactly Baumol's point, planned systems don't manage to do this.

Rather why we should indeed be having a market - even if government funded - in health care, yea even in the NHS. It's for the children, you see?

Which groups are most affected by minimum wage increases?

A new NBER paper released last month examines how minimum wage increases in the U.S. affect employment in low-skilled automatable jobs. Consistent with the majority of papers on the subject, it finds that low-skilled workers (high school diploma equivalent or less) holding such jobs become unemployed as a result of minimum wage increases.

As the authors explain, many papers examining the effects of increasing the minimum wage focus on teenagers and restaurant workers. However, this study aims to shed light on how other subgroups are disproportionately affected by minimum wage increases:

...the perspective we adopt in this paper suggests there may be subgroups of workers among those groups not usually considered in the minimum wage literature who may be adversely affected by minimum wages, because they tend to be employed in automatable jobs.

My colleague Sam Bowman has previously explained what elasticities mean in the context of the minimum wage debate: “an elasticity of -0.5 means that a 1% rise in the minimum wage is associated with a 0.5% fall in employment for the affected group.” Although the paper measures the effects of a minimum wage increase in a different way, the corresponding elasticities can easily be calculated.

Overall, the estimated elasticity for low skilled automatable jobs is -0.08: a small but negative effect on employment. However, the effects are markedly more pronounced for older workers (age >40) in automatable jobs and their young counterparts (age ≤25). In the case of automatable service industry jobs, low-skilled young people saw an elasticity of -0.28, with the figure for older workers being -0.22. Older manufacturing workers faced an elasticity of -0.19. Younger manufacturing workers fared even worse, with an elasticity of -0.53.

The authors also find that women in automatable jobs are more likely than men to become unemployed as a result of minimum wage increases. For men, overall elasticity was -0.09. For women, it was -0.13.

As for those low-skilled workers that managed to hold onto their automatable jobs post-minimum wage hike, the paper finds a decrease in the amount of hours worked:

...a $1 increase in the minimum wage generates a 0.23 decrease in hours worked for low-skilled individuals who held an automatable job in the previous period. The decline is negative and statistically significant in manufacturing, transport, wholesale, retail, and services (sometimes only at the 10-percent level).

Perhaps the most interesting finding is that the effects of minimum wage increases on automatable jobs seem to be getting larger over time. The Bureau of Labor Statistics dataset used by the authors runs from 1980-2015, but using data from 1995-2016, the authors find a noticeably higher disemployment effect (an overall elasticity of -0.27). This is hardly surprising; as technology advances, the cost of substituting labour for capital goes down. But there is now empirical evidence to support the claim that the disemployment effects of the minimum wage are getting worse over time.

Of course, this is just one paper in a sea of economic literature on the effects of the minimum wage. But it’s worth remembering that even if the minimum wage doesn’t kill jobs, or lower overall hours worked among the least well-off, it may still hurt the poor in other ways.

We confess to finding this amusing rather than worrying

Boris is being shouted at over that £350 million figure and perhaps he should be and perhaps he shouldn't. But it takes Mr. Polly Toynbee to tell us that this is a constitutional crisis:

The Boris Johnson affair – especially his dismissive rejection of the UK Statistics Authority – provokes a constitutional crisis. Not constitutional in the formal sense of the workings of parliament and the Crown, but in the spirit and procedures of Whitehall.

The head statistics bod tells us and Boris that £350 million might not be the correct number, could even be a misleading statistic.

We will confess that we don't monitor the slapdowns that head statistics bods give to Ministers but we do recall just the one earlier example, Harriet Harman and various Labour Ministers talking about the gender pay gap. A number then wrongly used by Gloria del Peiro some years later, also by the EHRC. We're absolutely certain that there are examples of Polly repeating it.

What we don't recall is The Guardian (except in that piece by one of us) pointing this out and we most certainly don't recall anyone, not even us, describing it as a constitutional crisis.

No, not worrying, for we are far too mature in years to even dream that people would use statistics to illuminate rather than obfuscate in politics. We're also well aware that if politics didn't have double standards it wouldn't have any standards at all.

Tu quoque is indeed a logical error but it is amusing when it can be pointed out.