Vaping after Brexit

Britain’s approach to regulating e-cigarettes was one of the best in the world, until the EU’s nonsensical Tobacco Products Directive (TPD) severely hampered the growth of this life-saving market. Thankfully, “Brexit offers an opportunity to return to a more liberal regulatory regime to the benefit of consumers and British businesses” according to a new report released today by the Institute for Economic Affairs. We will soon have the chance to become a true #VapeNaysh: something that we at the Adam Smith Institute are very enthusiastic about.

In Vaping Solutions: An easy Brexit win, author Christopher Snowdon begins by sketching a brief history of the search for safer smoking products, including the emergence of a new wave of smoking alternatives like e-cigarettes, snus, and heat-not-burn products. In the case of the UK, e-cigarettes have proven to be an especially appealing device that helps smokers quit while maintaining the pleasure of nicotine use (despite low awareness of the comparative benefits of vaping among consumers due to advertising restrictions):

By 2016, England had two million ex-smoking vapers who had given up smoking and a further 470,000 vapers who were using e-cigarettes as an aid to quitting (Department of Health 2017: 15). These figures were remarkably high in a country that had begun the vaping era with nine million smokers, but Britain has taken to e-cigarettes more enthusiastically than anywhere else. Five per cent of British adults are current users of e-cigarettes – significantly higher than the EU average of two per cent – and vaping prevalence among ex-smokers is exceptionally high at 14 per cent (the EU average is four per cent) (Eurobarometer 2017: 107).

Snowdon then addresses some common objections to liberalising e-cigarette regulation, starting with unfounded concerns about health risks and moving onto mythbusting the idea that they are a gateway to regular cigarette smoking. He concludes by highlighting the impetus for reform and general discontent with the TPD that exists across the British political landscape.

I’d also recommended reading the Appendix, which highlights the ridiculous provisions of the Tobacco Products Directive in more detail. For example, the tank that holds my e-cigarette’s liquid is currently illegal to sell in this country (I bought it in America). Why? Because it can hold 1ml more liquid than the EU has deemed to be necessary, presumably on the basis of reducing the risk posed by somehow accidentally drinking all of it. This is bad regulation and undoubtedly has a negative impact on public health:

Banning devices that can hold more than 2ml has led to the prohibition of a large part of the market for vaping devices, preventing consumers from using their preferred products and damaging the small and medium sized businesses that manufacture and sell them.

You can read the full report here.

What should we do after the Common Agricultural Policy?

What should we do after the Common Agricultural Policy?

I’m often amazed by how woolly the language used by groups like the National Farmers’ Union really is. Wacky ideas like “food security” (as if there is any conceivable scenario where Britain will be laid siege to by U-Boats) and farmers having some special “stewards of the countryside” connection to the land obscure the important facts. Taxpayers and consumers are rarely mentioned at all. Plain speaking about the costs and benefits of our current system is needed so we can think about what we’re paying for, what we’re getting, and how we can make sure taxpayers aren’t being stuck with a bill for something they don’t want or need.

This matters because after we leave the EU we’ll have to come up with our own agriculture policy, replacing the EU’s Common Agricultural Policy. (I will not discuss the Common External Tariff here for the sake of space.) Although agriculture is a small part of the economy, making up just 0.6% of gross value added, its environmental impact is quite important and the sector receives a large amount of money from the state – about £5bn every year.

The terrors of rising child poverty in the UK

The IFS is telling us that child poverty will rise in the coming years. We have no doubt that, given the measurements being used, they are correct. However, we do have a problem with the assumption that all seem to be making - that this is some terror which is a stain upon our society.

The number of children living in poverty will soar to a record 5.2 million over the next five years as government welfare cuts bite deepest on households with young families, a leading UK thinktank has said.

New research from the Institute for Fiscal Studies predicts an increase of more than a million in the number of children living in poverty, more than reversing all the progress made over the past 20 years.

The IFS said freezing benefits, the introduction of universal credit and less generous tax credits would mean a surge in child poverty and that the steepest increases would be in the most deprived parts of the country.

The first thing all need to know is that this is not in fact poverty being talked about but inequality - relative poverty that is. The definition is a child living in a household which, after housing costs, taxes and benefits, has less than 60% of median household income for the country (and adjusted for household size). This is not a measure of poverty, it's a measure of inequality.

It might be that an increase in inequality is one of those crimes which cries out to the very heavens. But the assumption being made by near all is that it is which we do regard as problematic. For the reduction in said inequality was a major part of the promises of the Blair and Brown administrations. That's fine, they got elected, they do get to put into practice their manifesto, that's how democracy works.

Yet here we are near a decade later still assuming that their political goals are those that we all should be following now. That's not something that is obviously true though, is it? Given that other people have been elected on a different manifesto or three.

One government declares a target,. a later one has others, and? 

But there's also the detail of what is being measured. The UK has great regional inequality. Wages are very much higher in London and the SE than they are in other regions. Prices are also rather different - yes, prices other than housing. But we are using that national median, including those higher incomes in certain areas, to create our 60% of and thus poverty line. The point about this being that we will count people in, say, the NE as being in relative poverty simply because both incomes and prices are lower there relative to London. They might even have higher real disposable incomes but they could still be classed as in poverty.

Given this regional nature of much of the UK's inequality using such national measurements doesn't really work in the first place.

We clearly differ from a large portion of the population in not worrying very much about relative poverty in the first place. But we would still insist that unless we start producing these measures of it on a regional, or possibly lower level than that, basis we're not even going to be measuring it properly.  And mismeasurement isn't a good way to start to deal with something, is it? 

At last some sense on climate change

A few years back perennial BS vendor Naomi Klein wrote a book called This Changes Everything. She argued, in typically economically illiterate fashion, that the threat of climate change requires us to reject mainstream economics and instead embrace the sort of socialist, planned economy that she has always supported. Klein and her ilk’s political opportunism may explain why so many on the right are sceptical of climate change. But, as we have argued before, climate change offers no rationale to abandon faith in free market economics.

On that note, Prof Dieter Helm’s government report into the cost of energy ought to be commended. He argues that repeated government intervention in the energy market has made tackling climate change much more expensive than it needs to be. The ‘free market’ solution to carbon emissions is straightforward: work out the cost of the external damage caused by pollution and force the polluter to pay it, usually in the form of a Pigouvian tax. Let the market do the rest. No need for lobbyists and politicians to bang on about their favoured technology.

Unfortunately, this system isn’t the status quo. When Helm asked BEIS to list the main interventions in the energy market, they listed seventeen (!) different interventions. They ranged from obligations on energy suppliers to source a proportion of their energy from renewables to Contracts for Difference which guarantee low-carbon electricity generators a fixed price above the market rate paid by consumers via a levy on energy suppliers.

Helm argues that there are two main problems with the existing approach. First, they often require the government to make forecasts about energy prices. As Helm points out ‘If the government is going to get deeply involved in being the central contractor, to contract on a technology-by-technology basis, and run multiple policy interventions, it needs to try to second-guess the results the market would otherwise have produced’.

But it just so happens that government is woefully bad at forecasting prices.

If the government instead accurately forecast falling fossil-fuel prices then it would have revealed that subsidising renewables was more expensive than first thought, and that switching from coal to gas should have been a much more important part of the decarbonisation process.

As Helm points out, there is a difference between government and market forecasts. “While the private sector has to forecast, and its investment decisions reflect companies’ assessment of the net present value of projects, it is important to recognise that this is not necessary for government, except in some specific and difficult cases. In a competitive electricity industry, prices are the outcomes of a competitive process, and they are revealed in the wholesale and capacity markets. They are not assumptions.”

But, government forecasts are not merely inaccurate. As the assumptions that government makes determine subsidy levels, they invite lobbying and policy-driven evidence.

That leads to a second problem: regulatory capture. The sheer complexity of interventions and how they interact with one another means that a straight-forward cost-benefit analysis of a particular programme is beyond even the brightest civil servants. This leads to a classic case of regulatory capture – “the particular interested party would have superior information. Asymmetric information between the government and regulators on the one hand, and the vested interest on the other, is a bigger problem, the more complex the interventions.”

Rather than the market determining the cheapest way to cut carbon emissions, rent seekers lobby to have their preferred energy sources subsidised. Helm notes that “Every main energy company and every main energy-consuming company has its own regulatory team, and a number of significant and in some cases highly effective trade bodies have emerged.”

Rather than attempting to centrally plan the energy sector, the Government should adopt Helm’s recommendation to replace the myriad interventions and shift to a single, unified carbon price that includes emissions from agriculture and transport as well as electricity. This would blunt the tools in the rent-seeker’s arsenal and incentivise the market to discover the cheapest way to cut emissions. Better yet, any revenue from a carbon charge could be used to eliminate the most pernicious effects of the tax system. We could boost investment by letting businesses deduct the full cost of their investments from their tax bills and protect the poorest by raising the NI threshold to £12,500.

It would surely be better than the status quo where instead of the market we rely on the government to pick winners. Government isn’t very good at picking winners, but as Helm says, “losers are good at picking governments”.

We really must say very well done to everyone here

It was, of course, entirely outrageous that users of credit cards could be charged for using their credit cards. Quite unconscionable that people might voluntarily pay a fee for the convenience of a form of electronic payment, or the immediate ability to borrow money. No, absolutely we could not allow this to continue to happen, something must be done!

From January "rip off" fees charged to consumers by companies and government bodies when they pay by credit card will be completely banned in the UK. 

The move was designed to help consumers by letting them pay by credit card free of charge.

Hmm, well, OK, so something was done then. Huzzah!

Except, well, except, it still costs someone, somewhere, something to maintain that network of cards, readers, machines, transfers, credit analysts and all the rest. That we've banned one method of paying for them hasn't made the costs disappear. The result is therefore:

But HMRC has said the move will force it to stop accepting credit cards altogether.

This because it is unable to absorb the cost of credit card fees as this would mean charging costs back to customers via the "public purse", therefore creating a burden for taxpayers.

Not charging the people who wish to use credit cards means that no one can use credit cards.

James Daley, director at Fairer Finance, said: "This is a very un-consumer friendly move by HMRC which restricts consumer choice. This is not what the Government intended to happen as a result of its fees crackdown.

It probably isn't what the government intended, no. It does seem to be what the government has done though, isn't it? 

At which point we're reminded of Tony Blair on his sofa one day gaily pondering the office of Lord Chancellor. An anachronism, we should abolish it. Which was done, moments later people pointed out that what passes for the British constitution doesn't in fact work unless there is someone, somewhere, called the Lord Chancellor to hold it all together. Thus the post had to be recreated.

The underlying point being that payment systems, economies, socio-political systems, are complicated matters, things which cannot just be managed upon a whim. There are always, but always, second, third and fourth order effects. Thus it isn't possible to just tweak one bit in isolation - detailed planning and legislation of this kind just does not work.

Most certainly there are things what must be done, even that group - a small one but it exists - of things which both must be done and which only government can do. A very useful rule for a functioning society being to restrict government to that - small but extant - group and leave the rest of us to figure things out by ourselves.

You know, if I'm happy to have to pay the credit card company 2% of my tax bill for the convenience of being able to pay it why should the law forbid me from doing that? 

Answers on a postcard to Stephen Barclay who as Economic Secretary to the Treasury pushed this through, building upon an EU directive concerning Mastercard and Visa to extend it to Amex and other cards.


Managed street prostitution zones tackle sexual abuse and rape

Since October 2014, Holbeck (an inner city area of Leeds) has hosted Britain’s first official managed area for legal street sex work. The zone was recently thrust into the spotlight by the BBC3 documentary Sex, Drugs and Murder: Life in the Red Light Zone, which was heavily criticized for bias by sex worker organizations. It encompasses various streets where street sex work already took place, which are situated away from residential housing. From 7pm to 7am, there are no cautions or arrests for loitering, soliciting, or kerb-crawling.

The overriding impetus behind creating this managed area was to make sex workers safer and encourage community harmony. Following a 12-month pilot, Leeds city officials made the scheme permanent, with an evaluation report highlighting improved relations between sex workers and police, increased willingness to report crimes, better access to social and healthcare interventions from the third sector, and a more positive attitude from the local community.

Although the Leeds evaluation report was an important first step in analyzing this approach, there is now stronger international evidence in favour of managed street sex work zones. In the Netherlands, similar areas are called ‘tippelzones’. A new study, published this month in the peer-reviewed American Economic Journal: Economic Policy, examines how tippelzones affect crime in Dutch cities.

Although similar in many ways, tippelzones are better-equipped than the managed area in Leeds. The study’s authors—Paul Bisschop, Stephen Kastoryano, and Bas van der Klaauw—explain:

Tippelzones are equipped with a variety of features. They provide resting quarters with washing amenities, clean needles, and local medical assistance and include separate servicing areas where prostitutes remain with clients in a safe environment. Permanent supervisors or semipermanent task forces are assigned to monitor the tippelzone and neighboring areas. The task forces are either rotating groups of agents from the local police district or new hirings for cities with larger tippelzones (11 additional officers in Amsterdam).

Between 1983 and 2004, nine Dutch cities introduced tippelzones. The paper compares rates of registered sexual abuse and rape over time in Dutch cities with tippelzones to those without. It finds that in the first two years after a tippelzone opened, citywide rates of sexual abuse and rape plummeted by a third. The researchers argue that this drop is due to the opening of tippelzones rather than other unobserved factors: pre-tippelzone crime trends in various categories were similar across all cities. Moreover, they do not find evidence that crime trends were influenced by crime shifting to different cities as tippelzones opened and licensing regimes were changed:

Our results do not indicate any shifts in sexual abuse or rape due to spillovers. This is not surprising. The movements of prostitutes were limited since the closing of tippelzones in Rotterdam, Amsterdam, and The Hague occurred simultaneously with the introduction of licensing systems in other cities which refused new entrants into tippelzones.

As the authors highlight, the effect of opening a tippelzone on rates of sexual abuse and rape is similar to the findings of a forthcoming paper by Scott Cunningham and Manisha Shah, which explores the effects of Rhode Island’s accidental decriminalization of indoor sex work on rape. Managed areas are no substitute for the full decriminalization approach—which has been the case in New Zealand since 2003—but local authorities looking to curb violence against sex workers ought to emulate what has been done in Leeds and the Dutch tippelzones.

Interest rate hikes don't make houses more affordable

"Never reason from a price change." This is a very useful dictum, coined by Scott Sumner, that tells people to ask why a price change happened before they conclude it will have a given set of effects. Typically, a fall in house prices makes houses more affordable; therefore if interest rates go up and house prices fall, houses are more affordable, right? Wrong.

Think why house prices are falling. House prices are falling because the demand for houses is falling. The demand for houses is falling because higher (market) interest rates mean that for any given mortgage loan, the monthly mortgage servicing cost is higher, and the total you pay over the course of a loan is higher. Any given house price is less affordable for a prospective homebuyer. Can housing be more affordable because it's less affordable?

Yes, prices fall when interest rates rise, or, more specifically, when expected market real interest rates for the next forty years or so rise. But they fall precisely because these higher rates make mortgage loans more expensive and thus make housing at any given price less affordable. It falls to the point where it is about as affordable as before in terms of expected total repayment compared to expected earnings and wealth.

The case is slightly different with crime, graffiti, pollution or other disamenities. They do make specific houses cheaper, through reducing demand for them. But it doesn't improve the affordability of any given quality of flat or house. It just makes them all worse, which makes them cheaper, like if you decreed that four of the slices of a pack of bread had to come mouldy.

Land value tax advocates claim that a land value tax makes housing more affordable. But house prices rapidly adjust to take account of amenities, transport links, and expected taxes that the property owner will pay. These "capitalise in" so to speak. If you add £50,000 of expected taxes to a property (or, precisely, a net present value of that) its price will go down about that much. But it doesn't make the house more affordable! You pay £50,000 less for the house and £50,000 more in tax. No change. Once again, reasoning from the price change leads us astray.

What could make housing more affordable? Rent controls do work in the narrow sense of making rents cheaper. But without incredibly clever rules and micromanagement they're likely to have lots of side costs that end up frustrating the original goal: reduced quality, long waiting lists, rationing by other mechanisms than money, even lower construction, fewer new rental units, and switching units away from rental. Subsidies like housing benefit can work, but where housing supply is highly restricted, they bid up rents, going into landlord pockets. Help to Buy is an even worse version of this. They help those who get subsidies, but cost those who don't, as well as those paying.

Social housing can make housing cheaper. But where is the price reduction coming from? Either it's a subsidy from the government, and has all the problems of housing benefit, but is even stickier—once you've got a sweet deal you won't move. Or it's coming through steamrollering regulations and restrictions that stop private builders—well why not just let them do it? It's not a magic bullet, but a special way of applying other bullets. If council tenants in central London could, many of them would sublet their apartment, live further out, and pocket the difference. We can cut out the middleman by giving benefits in cash, not in kind.

All these clever solutions are dancing around the only thing that will dent affordability without costly side-effects, picking favoured groups, handing out to landlord, or devastating quality: increasing supply. If we regulated cars like housing there would be a cottage industry of commentators telling us that car banking was the cause of high car prices, or that an oligopoly of only 15 car companies caused them, or that we had a brick shortage. But these are actually outcomes of our system, not causes.

Flatten out the housing supply curve and when housing vacancies get low, prices get high, and rents become unaffordable you see builders fill the gap until these fall to the point they can’t profit. It’s happened before and could happen again.

Detaching the case for a basic income from post-scarcity nonsense

A popular argument for the introduction of a Universal Basic Income is that it will become necessary in the face of increasing automation. As machines can perform ever more tasks, the demand for human labour will fall, inevitably resulting in increasing unemployment. Taken to a purported logical conclusion, at some point the economy can be entirely automated removing the need for work entirely even as cheap mass production continues, resulting in post-scarcity.  Without some other major reform, such as Universal Basic Services, proponents suggest a UBI is necessary to ensure everyone can have their needs met in a world where working for an income is impossible.

This is somewhat fantastical. Post-scarcity may or may not be theoretically possible. Even if it were, though, it is not something policy should be concerned with in the here and now. Current technology and realistic projections suggest that although a significant number of jobs are at risk (around 30% in the UK), we are very far from automating all jobs.

It would be extremely difficult to successfully, let alone efficiently, automate certain jobs, particularly those requiring creativity, empathy, or a human face. This applies across a range of industries and professions. In many cases, AI will serve as a tool for workers, rather than their replacement. Just because doctors can use diagnostic machines, doesn’t mean the doctor is redundant.  In any case, the process will be incremental and gradual, rather than there being a shock moment where humans are suddenly economically redundant.

It is also probably false that the number of jobs will fall significantly. The myth that innovation destroys jobs has popped up intermittently at least since the Luddites raged against the Spinning Jenny. What actually happens is that whilst certain jobs are destroyed new ones replace them. The total number of jobs is unaffected. Ultimately, arguments to the contrary are reducible to the lump of labour fallacy.

There’s no reason to think that even mass automation would be any different. Although demand for assembly line or fast food workers may fall, demand for coders will increase. Further, new, and maybe unpredictable, demands will develop as existing needs and wants are satisfied at lower cost, leading to the expansion of (perhaps surprising) industries and the creation of new, yet to be conceived, ones. Consider that we no longer need switchboard operators whilst no one in 1950 had much interest in having a smartphone.

This does not undermine the case for a UBI. Even if automation were not happening, it would be part of a desirable reform of welfare. It would be more efficient to replace the current system of benefits with a UBI, especially if it were in the form of a Negative Income Tax. Going further, it would be desirable to replace as much state welfare provision as possible with simply giving people money. Asides from removing layers of bureaucracy it would allow for greater autonomy and responsibility than direct state provision.

Given that (some) automation is happening and that the labour market has been disrupted by developments like the gig economy, there is an additional impetus for a UBI. There are distinctions between contemporary automation and historic disruptive innovations. The speed with of job creation and destruction has increased (consider the recent emergence of cab hailing apps and the prospect of driverless cars in the not-too-distant future).  

The difference between jobs may have increased. Where labour is increasingly specialised, the difference between skills needed to perform different jobs has increased. Switching from one unskilled/semi-skilled position to another is (comparatively) easier and cheaper than switching from a semi-skilled or skilled position to a, perhaps radically, different skilled role. Whilst a former hand weaver required training to be able to work machinery, this could be done relatively straightforwardly and on-the-job. Transitioning from driving a taxi to coding requires more formal and theoretical training.

If there is a real threat from automation, it is the prospect of higher structural unemployment. One “solution” is stifling innovation, whether through attacking the gig economy or “taxing robots”. This would be unfortunate and unnecessary. Whilst other policies, such as updating education and expanding it for adults, may have a role, a UBI would be useful. Especially if it is structured as a NIT, ensuring that extra work always pays, the risks to both the individual worker and the economy of long-term unemployment can be mitigated, without undermining innovation and labour market flexibility.

Bookshop owners make very little - Adam Smith explains why

Running a physical bookshop these days is not, as we all know, a path to great riches. In fact, it's more akin to working for something less than minimum wage. At which point we've two points we might want to make.

The first being that we do and should run the economy in the interests of consumers, not producers. If there is now some less costly, more efficient, manner of providing reading material to the people then we positively desire that that flourish. For that means we are being economic with our scarce resources and we can have both the reading and more of something else. 

The second being that we can work out why people do still run such bookshops:

When I last toured indie bookshops two years ago, there was ebullience at the peaking of Kindle sales and popular revulsion at Amazon’s tax arrangements. But no conventional economist could grasp how 900 indies are still in business. They are, because so much bookselling is done out of love. That’s wonderful, but the rest of us – and publishers producing special editions – must love them back.

Absolutely every conventional economist on the planet could and can explain that. Humans do not maximise income, they don't maximise cash, profits are not the be all and end all of life. We maximise utility. As Adam Smith pointed out those 241 years ago

THE five following are the principal circumstances which, so far as I have been able to observe, make up for a small pecuniary gain in some employments, and counterbalance a great one in others: first, the agreeableness or disagreeableness of the employments themselves; secondly, the easiness and cheapness, or the difficulty and expense of learning them; thirdly, the constancy or inconstancy of employment in them; fourthly, the small or great trust which must be reposed in those who exercise them; and, fifthly, the probability or improbability of success in them.

A substantial number of people find their utility maximised, even if not their incomes, by running bookshops. And why shouldn't people do what they find makes them happy? 

As we really must insist running a bookshop earns little money not despite people loving doing so but because.

Theories - yes, even sociological ones - do have to be based upon some connection with reality, however tenuous

The world is wallowing in something called affluenza apparently. What you and I might call that hugely welcome climb up out of the absolute poverty which has historically afflicted the human race is instead the rapine of the planet in pursuit of trivial desires, transient pleasures.

Hmm, well, OK, possibly so. However, we do rather insist that any such analysis needs to make some connection with the observable reality outside the windows of those ivory towers. We might even be something appalling, right wing even, to so insist but there we are, we do.

Which gives us this headscratcher:

It is physically impossible for the production of stuff to grow exponentially for another thousand years. It’s probably impossible for it to grow exponentially for another hundred. And if the world is to avoid dangerous climate change, the trajectory of human consumption will need to change radically in the coming decade. It’s not complicated. Everyone knows that we need to change direction; the debate is about the timing.

Consider the following. Billions of tonnes of food are thrown away each year because fruit has spots on it, because leafy vegetables show signs of snails, or because producers put misleading “best before” dates on their packaging. Billions of tonnes of oil are transformed into plastic bottles, which, while lasting for thousands of years, are intended to be used once and then thrown away.

We do agree, entirely, with the idea that infinite physical expansion in a finite physical space is not possible. However, we also prepared an entire little book on the subject of how pressing those limits were.

Which leads us to a little consternation at the idea that billions of tonnes of oil are transformed into plastic bottles. For we cannot work out how anyone could possibly believe that.

Not that these figures are accurate but they'll do. Global oil consumption is of the order of 100 million barrels a day, 35 billion barrels a year. Some, -ish, 5 billion tonnes a year. Billions in the claim we take to be two or more. And we're really very certain indeed that 20% or more of global oil consumption does not go into making plastic bottles for water.  

One closer, but still hugely exaggerated (it is a measure of the production and transport of bottled water, not the making of the bottles), claim is one third of one percent of US energy usage. The equivalent, even including the energy costs of the entire system, of something more like 35 million barrels for that country. The feedstock for the bottles tends not to come from oil anyway, 85% of it from the bits of natural gas that can't be shoved down the pipelines, the other 15% from the detritus of oil refining that we can't put into cars and planes.

That initial claim is therefore nonsense. The very best we could say about it is that they've missed three zeros on their numbers and being out by three orders of magnitude really doesn't inspire confidence. A slightly less charitable reading would be that they've simply no idea of the subject under discussion. Or possibly just have no general idea of the size of the world and the quantities in it.

Very much more importantly though if they're going to get simple things like this wrong then what of the more complex parts of their analysis? Like the existence of this affluenza thing in the first place?