Policy in Practice and interesting assumptions about welfare reform

Policy in Practice has done a "report" for the LGA about the effects of welfare changes. The result being that millions will be left wandering the streets apparently:

Over two million poor families will be more than £50 a week worse off by the end of the decade, according to an alarming analysis of welfare cuts, crippling rent rises and looming inflation.

In a bleak assessment of the plight of the poorest families in Britain, the study commissioned by the Local Government Association found that more than 84% of those set to lose £50 a week or more are households with children, either lone parents or couples. Almost two-thirds of them are working households, despite claims from ministers that they wish to create a welfare system that encourages work.

The major factor here is rising private rents while LHA numbers don't rise:

More than 2 million low-paid private renters face an average real-terms loss of £38.49 a week by 2020.

This clearly depends upon some estimation of what future rent rises are going to be. The assumption made in the report is that they will be large. On page 16, from a little under 5% a year to over 6% a year. Cumulative, of course.

ONS has private rental costs rising by less than 2% over the past 12 months.

Yes, probably best that we file this report in that round filing cabinet under the desk then. Certainly, forecasting is necessary for these sorts of things but starting from the current baseline is useful practice.

Nicolas Maduro and the dumbest economic idea in the world

A headline in The Times:

President Maduro of Venezuela caps prices to curb black market

As PJ O'Rourke remarked in Eat the Rich:

 It's no use trying to fix prices.  To do so, you must have a product that can't be replaced, and you must have complete agreement among all the people who control that product.  They're greedy or they wouldn't have gotten into the agreement, and they're greedy so they sneak out of it.  This is what was wrong with Paul Samuelson's idea about crop restrictions in Chapter 1, and this is why the members of OPEC are still wandering around in their bathrobes, pestering camels.

     Any good drug dealer can tell you that to ensure a monopoly, you need force.  To ensure a large monopoly, you need the kind of force only a government usually has.  And it still doesn't work. ...

     The government of Cuba, with force aplenty at its disposal, decided that beef cost too much. The price of beef was fixed at a very low level, and all the beef disappeared from the government ration stores.  The people of Cuba had to hassle tourists to get dollars to buy beef on the black market, where the price of beef turned out to be what beef costs.

     When the price of something is fixed below market level, that something disappears from the legal market.  And when the price of something is fixed above market level, the opposite occurs.  Say the customers at suburban Wheat Depot won't pay enough for wheat.  The U.S. government may decide to buy that wheat at higher prices.  Suddenly there's wheat everywhere.  It turns out that people have bushels of it in the attic.  The government is up to its dull, gaping mouth in wheat.  The wheat has to be given away.  The recipients of free wheat in the Inner City Wheatfare Program hawk the wheat at traffic lights, and what they get for it is exactly what people are willing to give.

There is indeed a tragedy in the fact that the President of Venezuela knows less economics than the humour correspondent for Rolling Stone.

The underlying point being that supply, demand and prices are not an optional part of our universe, they are how we humans interact with it. The only choice we have is whether we make such interactions safe, legal and commonplace or dangerous, backstreet and rare.

As ever with Polly it pays to study the details

The latest bright idea from Polly Toynbee is that we shouldn't sue the NHS when they irretrievably screw up a life through negligence because....well, that bit is rather left unsaid. We're in that penumbra of It's The Wonder Of The World and we should dance in the Olympic Stadium in praise rather than critique in any manner.

As the NAO points out, the costs of such negligence have risen substantially in recent years. Those costs are not quite as Polly, who presumably has read the report, manages to mangle

But one reason for official defensiveness is the soaring cost of insurance against claims, and insurance companies telling them to admit nothing. If fear of massive payouts from threadbare budgets were lifted, complaints could be handled faster and better.

As far as we're aware at least there are no insurance companies here. Matters are dealt with by NHS Resolution, itself funded by a levy on the Trusts. This is a useful and sensible manner for an organisation of this size to insure by the way. The risk pool is large enough that there's little point in trying to spread it further.

This is also wrong:

There used to be a concept of crown immunity that spelled out the special social contract between citizen and service. Is it time to return to something like it? Citizens need to ask themselves if they want ever larger sums of money drained from services to go to a few claimants who can prove their case, while a great many lawyers make more than the value of the original claims: the public realm belongs to us all, equally.

Crown Immunity for civil claims was lifted on Jan 1 1948, some 6 months or so before the formation of the NHS. As Frank Dobson pointed out in the Commons:

Crown immunity was first substantially undermined —if that is the right word—by the Crown Proceedings Act introduced by the Labour Government in 1947. It was felt necessary to move with the times and at least give individuals the opportunity and right to sue the Crown for damages. However, the Crown Proceedings Act does not permit criminal proceedings against the Crown or any of the agencies presently covered by Crown immunity. As a result, many laws do not apply to Crown property or to Crown institutions.

We find ourselves in the strange position that a health authority can be sued by an injured individual in the civil courts, possibly over being poisoned as a result of something going wrong in a kitchen, but the health authority cannot be prosecuted under the criminal aspects of the food hygiene regulations that the authority was breaking.

What Polly is thinking about is the lifting of Crown Immunity in respect of the regulatory apparatus, not civil damages for negligence, that happening in 1990.

We think it's a little fun to point out that the right to sue for civil injury was granted by a Labour government, the part putting the NHS under the more normal regulatory system of the land a Tory one. Polly complaining about that Labour action of course. 

This still leaves us, of course, with the desire to reduce the number of claims of negligence - we're not in favour of lives being irretrievably screwed up after all.

At which point we really should be, as is already in fact being tried, importing an aspect of the US medical system. Yes, we know, we'll all be bankrupted in our beds by being charged for our health care. Or, rather, perhaps not killed in them:

Today, aviation is arguably the safest form of transportation. Last year the accident rate had dropped to a low of only four fatal crashes from a total of 37.6 million flights.

Independent investigation is at the heart of this process. Professionals are given every reason to cooperate, because they know that investigations are not about finding scapegoats, but learning lessons.

Indeed, professionals are given a legal safe space so they speak up honestly, and can be penalised only where negligence or malevolence is proven.

Independent investigation and safe space protection are equally vital in healthcare.

Staff must be assured that when mistakes are caused by defective processes, they can speak up without being scapegoated.

Only by combating the "blame culture" in the NHS can transparency and meaningful change take place.

Hospitals that have developed a culture of open reporting have produced outstanding results.

The number of malpractice claims against the University of Illinois Medical Center, for example, fell by half in two years.

Virginia Mason, a hospital in Seattle, has seen a fall in insurance liability premiums of a staggering 74%.

As Gary Kaplan, its chief executive, put it: "We have a system that learns the lessons so that we can turn weaknesses into strengths".

There is indeed a solution to the problem Polly describes. It's just, as ever, not the solution that Polly proposes. Open investigation of systems and events then coming down like a tonne of bricks upon those negligent - yea even unto the actual punishment of individuals - is the way to do it. Rather than just not suing the NHS because it's a Wonder.

Socialism's the cure for famine apparently

What we might call one of those interesting claims from US academia:

In the 19th century, all of Ireland was part of the United Kingdom. Wealthy Protestant families with ties to England owned most of the land, renting small tracts to Catholic subsistence farmers. While landlords dedicated acres upon acres to raising cattle and grains for export to Britain, renters were left with scarcely enough land to sustain their families.

The plots were so tiny that tenant farmers came to rely on a single, durable, calorie-rich crop — the potato. In the early 1840s, a fungus afflicting potatoes arrived from the continent, and it devastated small farms, leading to widespread famine. One million Irish people died. Another million immigrated to Britain, Australia and North America. The population of Ireland has never recovered. Even now, fewer people live on the island now than did before the blight.

“Basically, what you had is a society controlled by what we would today call neoliberal capitalism, in which the rich viewed poor people as totally superfluous,” said Kerby Miller, professor emeritus of history at the University of Missouri. 

Those of us a little closer to events tend to think of Ireland pre-famine as being rather more akin to a feudal society than a neoliberal one. We're also pretty sure that Peel's rolling out of neoliberalism, the abolition of the Corn Laws and thus lower import prices for wheat, were a pretty good idea. Not sufficient as subsequent events showed but still a good idea.

However, it's this which produces the gasp:

“I certainly do think that the effects of climate change under neoliberal capitalism, under the governing ideology, is just going to be an unbelievable disaster,” Miller said. “Barring a socialist revolution — which completely changes the nation’s value system so that sharing, rather than competition and exploitation, become the primary values — I’m afraid I really don’t hold out a whole lot of hope.”

We would take the great lesson of the 20th century to be that the one thing socialism doesn't produce is bounteous food for the people.

But, you know, maybe things are different in American academe? 

Yeah, actually we will take fries with that...

Today the BBC led with a story from busybodies at the Royal Society for Public Health (and Slimming World – go figure…) attacking retailers that like to sell their wares to a completely suspecting public.

The public were so aware, the RSPH told us, that nearly 8 out of 10 of us have noticed that we’re being upsold to every single week.

This, the RSPH bemoaned, is a disgrace. But is it really? What’s so bad about a food retailer offering you the chance to buy a lot more food for a little bit more money? Are the Royal Society for Public Health really saying you should be banned for getting value for money?

Think about the last time you were upsold to: a snack and drink with your sandwich at Tesco, those fries and a drink with your Big Mac, the rest of the wine bottle if you buy three glasses at the pub. You'll have known exactly what you’re buying, you'll have known exactly what you were paying and you'd have had the chance to say no at any point of the transaction.

Which makes the wording of the report a little bit bizarre to say the least:

“One in three buy a larger coffee than intended, upgrade to a large meal in a fast food restaurant and buy chocolate at the till in a petrol station in the course of a typical week.”

But by buying the larger size, at a fraction more, you are indicating precisely the amount you intended to buy at an amount you are willing to spend. Upselling is at the heart of a whole swathe of retail industries. It is indeed a tool to get you to purchase more but more than that it exposes you to possibilities you might not have not known were available and more accurately reflects your preferences – as Neil Patel noted the most successful upsells are those that get a consumer to realise their true need and makes them willing to purchase further.

“People who take an upsell will generally spend around 17% more money but receive 55% more calories.”

You get a bit more product that you actually want and the company gets a bit more money. Oh look, just like trade generally, it’s a win-win.

One other finding was illuminating – that this practice is actually most likely to benefit the group that has the fastest metabolisms and the slimmest wallets - the young. In fact, Slimming World and he RSPH found that:

“Young people aged 18-24 are the most likely to experience upselling, consuming an additional 750 calories per week as a result and potentially gaining 11lbs in a year.”

We all have the chance to buy some more at a price you can choose to take, completely understanding the transaction. Has capitalism ever been so delicious?

An absurd part of the IPPR's demand for economic justice

The IPPR's report on economic justice is a target rich environment. We must, apparently, have more of our economy in manufacturing, failing to note that manufacturing as a share of the global economy is falling. More of the economy must be paid in wages and salaries, failing to note that the decline of the labour share is nothing to do with profits at all, it is because VAT rates have risen, as has self-employment. We could go on and we probably shall at some point. But this is simply ridiculous:

 By 2030, the British economy will have closed the gender pay gap and the ethnic pay gap.

The gender pay gap we have is not because men and women are paid differently. It's because, by and large, men and women do different things when they become parents. Thus the average pay of men and women varies because of the discrimination done by people about how to live their lives.

Fathers earn more than non-fathers - yes, after we've corrected for age, education and all that. Mothers earn less than non-mothers among women, again correcting for everything else that might vary. At least one study has found that there is no gender pay gap at all, it is purely and only the familial position which matters, primary child carer or not. That explains everything which needs to be explained, alone and unadorned.

Thus the demand is that in only 13 years' time we will have half of fathers being the primary child carer? We do think that's possibly a bit more of a social revolution than is likely to happen.

The aim is laughable because they've not understood the reason for what they are observing, never a good basis for policy making.

To really rip off the people you need to be a government

The Guardian is making much of this Azerbaijani Laundromat, the idea that people linked to - allegations as yet of course - the government of Azerbaijan have been using banks and limited companies to siphon money off to do all sorts of things.

Azerbaijan’s ruling elite operated a secret $2.9bn (£2.2bn) scheme to pay prominent Europeans, buy luxury goods and launder money through a network of opaque British companies, an investigation by the Guardian reveals.

Leaked data shows that the Azerbaijani leadership, accused of serial human rights abuses, systemic corruption and rigging elections, made more than 16,000 covert payments from 2012 to 2014.

We have no idea of the veracity of any of this, of course. But assume whichever way you prefer, it does show one thing. That to truly rip off the people you need to be the government. Only in that manner is it possible to actually force people into coughing up for such payments. Everyone else, however greedy a monopolist even, has to produce something of value in return in order to cash in.

This is thus a warning about government access to our wallets more than anything else - not a point we expect The Guardian to be making any time soon.

After Brexit, let's take the lead in free trade with the developing world

I have a piece at the Times's Red Box that argues that, after Brexit, the UK should grant full tariff- and quota-free access to its markets to many of the world's poorest countries:

The EU’s Everything But Arms (EBA) protocol came into effect in 2001 and applies to the world’s least developed countries as defined by the United Nations. Along with Haiti and a few Asian countries like Bangladesh and Cambodia, most of these countries are in sub-Saharan Africa, like Ethiopia and Mozambique. All imports except armaments from these countries face zero tariffs (taxes on imports) and quotas (rules limiting the number of items that can be brought in in a particular year). In 2014 goods from these countries accounted for €17bn worth of imports to the EU.

Countries that are still very poor but slightly more developed, like Vietnam, Kenya and Nigeria, face the Generalised System of Preferences (GSP) regime, which give preferential access to European markets compared to that of a normal “most favoured nation”. For better market access, countries must implement 27 international conventions on things like human rights, environmental protection and good governance.

The GSP is better than nothing but still holds back trade and growth. Unprocessed coffee bean imports from Kenya are not taxed, but roasted beans are at a 2.6 per cent rate. So are cut flowers and vegetables like broccoli and beans, which can face tariffs of up to 10.1 per cent. Rules like this inhibit the development of supply chains and stop value from accruing in the producing countries. And they make British consumers worse off through higher prices.

The British government has already said that it wants to continue giving preferential access to developing countries after it leaves the customs union. This is good, but we can do better. If we accept the principle that free trade makes both parties better off, it should aim to extend the zero-tariff and -quota Everything But Arms protocol to many more countries, along with less strict enforcement of rules of origin customs checks.

Read the whole thing.

Well, at least this is a non-stupid way of doing it

We have made much here, over the years, of the merits and non-merits of recycling. If the activity is profitable then do it by all means - and if it is profitable then no one need be subsidised to do it nor forced to either.

If it's not profitable then don't do it, unless there is some compelling third reason - we're just fine with the idea that radioactive waste should be cleaned up at an accounting loss for there is still an economic profit in there. That doesn't apply to plastic bottles and the like so landfill is the best solution. Aluminium cans are a little different, in that once collected they are indeed profitable to recycle but those collection costs can make them not so.

Having said all of that about the task that is being undertaken this is at least a non-stupid way to achieve it

The Scottish government is planning to introduce a deposit return scheme for bottles and cans.

Customers would pay a surcharge when purchasing bottles or cans under the programme, which will be refunded when they return them to a shop.

Assume, in violation of our strictures above, that we really do want to recycle everything or near it. The way to do it is to make recycling have a positive value. Instead of browbeating everyone into a particular form of behaviour, or providing 7 plastic bins for each family, simply charge a returnable deposit. Some combination of Bob a Job week, professional scavengers and pocket money will then ensure that the collection to the recycling centres happens.

Or, as we might put it, the solution to a problem that markets unadorned are not solving is to use markets to solve it. Stick in that crowbar of what we could variously call either a deposit or a Pigou Tax and we're done. Make doing the activity have a positive value, not doing it a negative one and leave human nature to deal with the rest of it.

As before, whether this needs to be done is another matter but we should indeed give credit to people rediscovering the old system which does have the merit of actually working.

For efficiency’s sake, let’s tax the young less.

In The Millennial Manifesto, the ASI’s President Dr Madsen Pirie advocated a series of policies that the Conservatives could implement to win over young people attracted by Corbyn’s radical socialist manifesto. Like many ASI reports it advocated tax cuts, but controversially Madsen argued that we should cut taxes on the young. In particular, it argued that for under 25s, we should abolish air-passenger duty, create a lower band of national insurance at 8% (instead of the 12% it currently is), and bring in a 50 per cent council tax discount (on top of the current student exemption).

When Madsen speaks politicians are wise to listen, and today we have Conservative MP Nadhim Zahawi advocating that to win over young voters the Tories should cut their income taxes. Nadhim goes further than The Millennial Manifesto by suggesting that for as little as £2.4bn we could cut the basic rate of income tax for under 30s to just 10%.

It’s easy to dismiss targeted tax cuts for young people as just another bribe. But as my colleague Ben argued persuasively in The Times, people vote for the good of the country not for election giveaways.

However, there’s actually a serious economic logic behind it, going back to a paper by legendary mathematician, philosopher and economist Frank Ramsey in 1927. Ramsey argued that the optimal consumption tax (optimal in the sense it caused the least possible distortion) would vary depending on the supply and demand elasticities of each different good. Goods where big changes in price have little effect on overall consumption should be tax heavily, while goods which are incredibly responsive to prices changes should be taxed lightly. That’s part of the reason why cigarettes and petrol are taxed more heavily than other goods (heavy even accounting for negative externalities like pollution and the burden on the NHS). Smokers and motorists make good cash cows because few of them stop driving or quit smoking in response to higher prices at the pump or the tobacconist.

Ramsey’s insight does not simply apply to sales taxes, it applies equally to taxes on labour income. Each individual has a different response to wages and taxes. Elon Musk for instance would probably still work on Tesla and Space X all day if he had to pay a 95% tax rate. Others might choose to cutback their hours or pick a more relaxing lower-paid job at such high tax rates. If the goal is to raise revenue without slowing growth, the aim should be to tax ability but not effort.

We currently tax income, which is a function of ability and effort. But if we wanted to maximise growth we would tax ability and not effort. We can imagine all sorts of dystopian systems where people are tested at birth and those with the genes for hard work or high intelligence are assigned a higher tax rate than those lacking. Or given that taller people on average earn more we could simply use a ruler. Economists call this tagging.

But there’s an even less intrusive way to tax ability more and effort less – age-based taxation. The average middle-aged person is more productive than the average young person. By picking up experience on the job middle-aged people are able to access senior management roles that are typically not open to younger employees. We could tax graduates more and non-graduates less, because on average that’d hit high ability but not necessarily high effort individuals more. But the problem is that it’d discourage studying in the first place. Ageing is different; it’s very difficult to avoid turning 30.

But it’s not simply ability that we care about. It’s also the willingness to work and to move countries. It’s harder for a middle-aged person to flee Britain’s taxes than a young person. Middle-aged people typically have families to support that they can’t simply uproot and some countries even have age-related penalties in their immigration system. Young people typically have a smaller incentive to seek out high-paid work. They could seek out further study or go travelling. And the wage gap between a high-paid but unfulfilling job in finance versus a low-paid but fulfilling job in a charity is smaller for young people than older people.

For those reasons, cutting taxes on the young and raising them by the same amount on the middle-aged would likely boost output. Cremer, Gahvari and Lozachmeur find that if you cut taxes for under 35s (and over 55s who have the option of retiring) and raised them on 36-54 year olds to compensate, you would boost overall economic welfare.

We also implicitly tax younger people more than older people already. By taxing income and not consumption. As I’ve argued previously even relatively low taxes on income can imply high taxes on future consumption from savings. This in effect shifts the tax burden from early work to later work.

Tagging is certainly controversial and has costs. It adds complexity to an already complex tax system. But there’s a clear, if unintuitive, economic rationale beyond simply bribing younger voters. So for the sake of efficiency not intergenerational justice, let's tax the young less.