Bale and the market

Is Spurs striker Gareth Bale really worth €100m? Plus whatever eye-watering salary his new employers, Real Madrid, will pay him? Isn't it immoral to pay footballers such enormous amounts for what is basically entertainment, when nurses (say), who do such an essential job, are so badly paid?

You can certainly discuss the morality of such questions, but pay is the outcome of a market process, not a moral question. If millions of people admire the skill of a footballer – or for that matter a singer, a guitar player, an artist, an actor, an architect—and are prepared to pay well to see that person in action, who has acted immorally? You might say that "society" should value nurses more than footballers, but value, like beauty, is in the eye of the beholder. It is a personal reaction to something. "Society" is not a person with values of its own: only individuals can value things. So if we are criticising the price that is put on a footballer, it is individuals that we are really criticising, those that voluntarily pay to see him. But none of those individual customers has acted unjustly or dishonestly or wrongly or immorally in any way.

When people start criticising how much different people are paid for different jobs, they are making a moral judgement about the distribution of rewards. The implication is that rewards should be distributed in some other manner. But who is to judge. But as the Nobel economist F.A. Hayek noted in The Road to Serfdom, how could we ever decide what would be the "fair" pay of a nurse, a butcher, a coal miner, a judge, a deep sea diver, a tax inspector, the inventor of a life-saving drug or a professor of mathematics? Appealing to ideas such as "'social justice" or "value to society" or "merit" does not give us the slightest help, because we all disagree on these things.

In free markets, people pay us for the goods and services we produce because they value those products. So market rewards do depend, very directly, on the value that we deliver to other members of our society. They reflect the scarcity and skill of the producers, the numbers of customers who want the service and the urgency and importance that buyers attach to it. That is a pretty good way of rewarding people's contribution to human life. If earnings are to be decided by right-thinking politicians and officials, the main gainers will instead be those groups with the best lobbying operations. Which won't be nurses.

Help to Buy scheme will worsen Britain's housing crisis, says new Adam Smith Institute paper

Today we've launched a new briefing paper on Help to Buy, the government's scheme to increase home ownership. Unfortunately it seems more likely to inflate the housing bubble even more and risk taxpayer money in the process. Here's our press release:

Help to Buy scheme will worsen Britain's housing crisis, says new Adam Smith Institute paper

  • The government’s Help to Buy scheme will drive up house prices by increasing demand for but not supply of housing – it will not improve overall access
  • Help to Buy risks taxpayers’ money with no guarantee of a return
  • By subsidising homebuyers and introducing the possibility of socialising lender losses, Help to Buy risks recreating the perverse incentives that led to the 2000s-era US housing bubble

The government’s Help to Buy scheme, which offers government-backed equity loans to house buyers and mortgage guarantees to banks, will distort the housing market, risk taxpayers’ money with no promise of a return, and introduce into the UK housing market the same perverse incentives that led to the US subprime mortgage crisis, argues a new paper by the Adam Smith Institute, released today (Monday, September 2nd).

The report, Burning Down the House (available to download here), argues that without measures to increase supply by liberalising planning laws, the Help to Buy scheme will simply drive up house prices, making housing no more accessible overall. Indeed, users of Help to Buy benefit at the expense of those who fail to use the subsidy scheme; the policy is like putting a platform under the buyer while also raising the bottom rung on the housing ladder.

If already badly-off people are less likely to access the scheme, it could have a particularly hard effect on the poor, the report says, a group who already lose out badly—the UK's extreme restrictions on housing supply have been calculated to add 3.5 percentage points to the GINI coefficient measure of inequality.

According to the report, a preferred alternative would be liberalising a hostile regulatory environment which inhibits the construction of additional housing supply—allowing houses to be built in more places, and slashing regulation on doing so. According to official statistics, only about 10% of the UK is built on, and of that the biggest fraction is gardens. If we want to control runaway house prices and give first-timers a chance to get on the ladder, we need to allow more houses to be built.

"It is crazy for the government to stoke demand even more without addressing supply and claim that this will help the housing market," said the Institute's Research Director Sam Bowman. "Making taxpayer-subsidised handouts to homebuyers will only drive further house prices up, risking a bubble, improving access for a select few but making housing even more unaffordable for most people."

"On the other hand, radical liberalisation of the planning system has the potential to drive massive economic growth, drastically reduce housing costs for the badly-off, and give millions more a chance to own property of their own. "

"Deregulation is a way of addressing the housing supply shortage while avoiding recourse to public fiscal intervention,” commented Preston Byrne, the Institute’s Legal Fellow. "If the Government is serious about finding a long-term solution to the housing crisis, it's time to take a hard look in the mirror and examine the role existing planning regimes – both local and national – play in regulating and inhibiting new housing construction.”

This paper is available to download here.

In which we are lectured by a Scottish socialist

One should never underestimate the ability of a Scottish socialist to observe a true and pertinent fact about the world and then entirely garble the significance of it. As with this example:

Next you’ll be told that tax makes you uncompetitive internationally. Except even the most market-friendly of competitiveness indicators, such as those produced by the World Trade Organisation or the IMD international business school places high-tax nations such as Sweden, Norway, Germany or Denmark well above the UK. In fact, most of the most competitive countries economically have higher tax rates than the UK and almost all the Nordic nations are in the top ten. Once again, since higher tax favours productive and manufacturing enterprises over low-pay, low-productivity, low-margin businesses, this is exactly what you’d expect to happen.

It is true that the Nordics are extremely market friendly by most measures: Scott Sumner has written a paper pointing out that Denmark might have the most economically liberal economy in the rich world for example. It is also true that they have eyewateringly high tax rates: although we should point out that they don't have high tax rates on business, corporate profits or returns to capital. Those are all quite low by international standards in fact. It's the income and consumption tax rates that are high.

So much of the observation is correct. It's the interpretation that isn't. Our Scot seems to think that it is high tax which causes this economic liberalssim. Not so, it is the economic liberalism that allows the gouging of the population.

To take a step backwards: we do know that there are two things that can restrict the growth of an economy. One is high rates of tax (especially on those profits and returns to capital). The other is regulation of what people may do in the economy. You can thus imagine four states of the economy: high regulation and high tax, low of either and high of the other, and then a low tax low regulation environment. That high regulation and high tax economy isn't going to get very far. The low and low we'd see impressive growth in. The two mixed cases are where the interest is in this case. If you want to have a high tax economy then you've simply got to have that market friendly regulation thing going for you. If you're going to go for the regulation by armies of pettifogging bureaucrats then you need to have the low tax rates: otherwise nothing will ever get done.

Which leads us to our political lesson. You can indeed have an economy with reasonable growth and also high tax rates. But you can only do so by having a cuthroat economically liberal economy underneath those taxes. No other system will generate enough wealth for you to be able to tax it that much. Now of course, around here we'd prefer to have the low tax and low regulation economy because that way we'd get truly great growth, not just a reasonable amount. But the lesson we need our Scottish socialist to heed is that if you do want that high tax economy then you've got to give up all of that other meddling in the economy so beloved of socialists. Which isn't, I'm sad to have to say, either something they would understand nor a deal they would accept if they did.

Part of this argument is correct and part isn't

So, sure — this is all just capitalism, and I’m all for it. But market failure is also a hallmark of capitalism, and those purporting to hold forth on the economy have a responsibility to recognize such failures, particularly when they violate norms of equity and opportunity. If significant portions of some industries pay wages on which grown-ups cannot support a family, while other industries post historic profits, and, importantly, the gains to the latter fail to ever reach the former, then corrective policy is needed. Some of that should be done through wage subsidies and work support (for example, the earned-income tax credit, and health and housing support), and some should be through moderate increases in the minimum wage. To me, that’s not radicalism. It’s plain common sense.

That's Jared Bernstein over in the US. And the part of it that is correct is this:

If significant portions of some industries pay wages on which grown-ups cannot support a family, while other industries post historic profits, and, importantly, the gains to the latter fail to ever reach the former, then corrective policy is needed.

The rest is error: the most obvious one being that this is not capitalism doing this this is markets doing this and the two are very much not the same thing.

What needs to be understood is that prices (and wages and profits are both prices) are a source of information as well as the reward for having done something. High profits indicates, in he absence of rent seeking etc, that whatever it is that is being done is adding high value. And we like people adding lots of value because that value is, by definition, the wealth that society is creating. That wealth that we all then get to enjoy: more profits means we're all richer.

Similarly low wages for a particular line of work indicates that this particular line of work isn't adding much value. If this line of work were adding great value then wages would be rising in order to encourage more people to enter it and add more of that high value. We would very much prefer that people stopped doing these low value added things and went off to do high value added things instead. Thus, as above, increasing the total amount of value that all in society can then enjoy.

In which case taxing the people adding lots of value to give the money to the people adding very little value is an insane economic policy. We are deliberately punishing those making the society richer in order to subsidise those who are not.

None of this changes the fact that we are going to have a welfare policy and some redistribution. Nor that the richer parts of society are, clearly and obviously, going to be the people paying for most of that. But taxing rich people to provide it is just an unfortunate necessity of having any of that welfare or redistribution at all (and we do indeed all believe that there's going to be some of both. No one at all is suggesting that there will never be any State provision of those two at all.). But that's a very different argument from the one that Bernstein is making, that we should deliberately tax and dissuade those who produce more value in order to subsidise those who produce little. That really would be an insane economic policy.

The merits of ocean fertilisation

I've written here and elsewhere before about the potential merits of ocean fertilisation. Assume that climate change is a true problem (as I do) and that we'd like to do something about it (as I do). The question then becomes what should we do? And we know that there are certain areas of the ocean (quite a lot of them actually) where there is insufficient iron in the water to allow algae to grow. Add iron to these areas (as winds blowing Saharan dust sometimes do, as volcanoes sometimes do) and we get an algal bloom. This increases the supply of fish, which is nice, and some portion of those algae, when they die, fall to the ocean floor and end up as the next layer of chalk. We're thus extracting CO2 from the atmosphere and incorporating it into rock, this is true carbon sequestration.

We know all of this, we know all of this is true. The bit we don't know is quite how effective or efficient it is. Just not sure how much of that CO2 ends up in rock and how much just gets recycled around through the circle of life. Here's one claim from someone who has tried to perform the experiment:

estimates that its experiment absorbed 5 million metric tons of carbon dioxide.

That experiment costs $2.5 million to perform. We've thus the claim that sequestration of a tonne of CO2 costs 50 cents. Which is a pretty reasonable price when you think about it. Lord Stern told us that the social costs of one tonne of CO2 is $80. We're thus $79.50 better off for each tonne we turn into chalk in this manner.

Now it is true that others dispute these costs. But we've only had a couple of tests. This particular, not very well monitored, one and one other recently in the Southern Ocean. Given the claims being made here this would seem to be an obvious no brainer to test further. It's possibly extraordinarily cheap to do and it's certainly extraordinarily cheap to test it to see whether it is cheap. Compared to spending $100 billion on the bloody windmills at least.

So governments and scientists are rushing to perform those tests aren't they? We've matelots hurling iron powder over the bulwarks all over the place?

No, no we don't:

They wanted to see if the iron would cause a bloom of algae that could promote fish numbers and absorb the greenhouse gas carbon dioxide from the atmosphere. Instead, in March, they were raided by Canadian officials for illegal dumping at sea.


Environment Canada, the nation's environment ministry, said the experiment was illegal under Canadian law and violated the U.N. Convention on Biological Diversity (CBD) and the London Convention, which governs dumping at sea. World leaders at a U.N. Earth Summit in Rio de Janeiro last year urged "utmost caution" in ocean fertilization due to worries that it could disrupt marine life. Many scientists remain skeptical about whether any form of geoengineering will solve climate change. Allowing research, they argue, may detract from efforts to reduce emissions from cars, power plants and factories.

You what?

The ETC Group, a Canada-based non-governmental organization opposed to geoengineering, said even research is risky. "The moment you accept that geoengineering is a Plan B it will become Plan A for some governments," executive director Pat Mooney said.

Shouldn't we try to find out whether Plan B is going to be better and cheaper than Plan A?

Criticism of HSRC included a statement of "grave concern" last November by the 87 nations in the London Convention, which regulates dumping at sea. "Ocean fertilization has the potential to have widespread, long-lasting and severe impacts on the marine environment, with implications for human health," it said.

Err, yes, that's what we're trying to find out. If it doesn't have large effects then it won't be worth doing. If it does then we've solved our largest environmental problem.

The draft report by the U.N. panel of scientists says ocean fertilization can have unknown effects. Added iron might create algae locally but rob nutrients, such as nitrogen and phosphorus, from other areas. Extra iron could also produce greenhouse gases such as methane in the sea and increase acid levels in the deep oceans as the waste decays.

So, err, shouldn't we do the experiments and find out?

But as you can see, that's not the way that many, including officialdom, are working. It's not just that it might not work out the way we'd like it to. It's that if it does work out as a cheap way to sequester CO2 then that in itself would be a bad thing. As would lots of cheap fish presumably.

I've long said that there is indeed a climate change conspiracy. But it isn't about its existence, not about the science at all. It's about what is the correct response to that science. There's a definite blocking off of the various technologies and policies that could in theory deal with the problem for us: we're not even allowed to do the research to find out whether it's actually necessary to stop using fossil fuels or not. Because it seems that it's already been decided that that is the only possible manner of dealing with the problem, the elimination of the use of fossil fuels. Even if that's not the best way to deal with the basic underlying problem.

And if I'm honest about it that makes me extremely angry. I don't know whether ocean fertilisation will work or not. I've had emails from researchers arguing both sides of it. But I'm incandescent with rage at the argument that we shouldn't go and find out the truth because said truth might be that it does indeed work.

Curbing payday lending is a fool's errand

As the ethical debate around ‘payday loans’ continues, local councils have begun to rally against these lenders. Plymouth Council recently became the first local authority in Britain to ban payday companies from advertising across their billboards and bus shelters, while other councils are looking at following suit.  Councils such as Plymouth City, Newcastle, Dundee and Cheshire East have also already blocked access to the top 50 payday loan websites across their public networks of buildings, libraries and  community centers.

This is partially a response to the Office of Fair Trading’s (OFT) report citing widespread regulatory non-compliance throughout the industry, including a prevalence of irresponsible lending. Whilst the new Financial Conduct Authority is soon to start a consultation over beefing-up industry regulation, the OFT has also instructed the Competition Commission (CC) to look for evidence of any prevention, restriction or distortion of competition within the industry. Last week, the CC announced they would be studying the market for evidence of  “impediments to customer’s ability to search, switch and identify the best value product” and any “significant barriers to [firm’s] successful entry or expansion”.

The CC is probably expecting any anti-competitive behavior to stem from firm’s actions or the market’s structure. However, by restricting consumer’s access to information and erecting new barriers to entry, local councils are themselves making the market anti-competitive.

Blocking payday websites in public buildings means that those needing public internet to research loans are prevented from exploring the range of options open to them. These are generally the people most likely to benefit from discovering lower rates of repayment and flexible deals — and the kind of vulnerable people the council’s actions are designed to protect. Furthermore, banning advertising is simply likely to entrench the market share of current top providers who have an established image — regardless of the merits of other companies. The FCA is currently contemplating a cigarette-style nationwide ban on payday loan advertising , which would further compound this problem. Council’s actions may be designed to hurt the loan companies, but they end up harming consumers too.

It is interesting to see what, if anything, the CC will say about this impediment to effective competition. Given current public opinion it seems likely that any action taken to obstruct the publically-defined ‘predatory’ loan companies is here to stay, even if it were to negatively impact on the most vulnerable.

Instead of banning adverts and adding tighter regulation — both of which are designed to make it harder for these payday companies to operate — there are more effective ways to address the rise of payday loans.

Whilst currently only a small source of finance Credit Unions provide a viable and ethical alternative to payday lenders. However, they currently face a monthly interest cap of 2% and are often a loss-making venture. Easing the restrictions on Credit Unions would better allow them to make profits, grow in scope and effectively compete with payday companies.

Secondly, making the benefits system simpler would provide some with greater financial certainty and could eliminate some of the reasons for resorting to a quick loan.  A benefits system better at tracking changes in people’s situations would reduce the delays people face to get the correct benefits and would reduce the number of people having to pay back over- payments. Similarly, tapering the withdrawal rate of benefits in a gradual way would ensure that people entering work aren’t suddenly hit with unexpected surprises and bills.

Tackling what we deem a worrying trend in society doesn’t always require bans and regulation. It is possible to create alternatives to payday loans and reduce the need to use them without demonizing or blaming the lenders themselves.

As I've been saying for 15 years now about the euro

Not long ago I undertook the challenge to try and find the oldest thing I'd written that could still be found on the internet. It turned out to be (without a really, really, thorough search) something from 1999 in sci.econ. On the subject of how the euro was most unlikely to work as well as the US $ did simply because the eurozone was much less of an optimal currency area than the US was. Well, lookee here:

The euro zone is (to no one's surprise) a less developed currency zone than America. In economic jargon, America: “ more likely than the eurozone to satisfy the three Mundell-style optimal currency area criteria regarding the integration of product markets, symmetry of shocks, and labor mobility, as well as [the] criterion regarding the ability of a central fiscal authority to smooth shocks across regions.”

The effect of all of this is substantial:

For the sample of American regions, the difference between the desired and the actual policy rates was usually between 0 and 200 basis points. In other words, many areas received an interest rate that was perfect for their economy, and almost none received one that was more than two percentage points off. The euro area is a different story. The desired interest rate for peripheral countries (such as Greece and Portugal) was usually 300 basis points above the actual rate—before the crisis. After the crisis, the target was a massive 500-700 basis points below the actual rate.

Imagine how much you must have to hate people to insist upon interest rates that are that far out of line with local needs? And further imagine how appalling things would be here in the UK if we had joined. Interest rates 300 bp below what they actually were during the Brown Boom. And right now those hundreds of points above what they should be? And no possibility at all of doing QE of course, that correct monetary response to being at the zero lower bound for nominal interest rates.

You will all know that my innate bias is that we're well out of the whole thing. But it's not actually an innate bias: it's a considered response to having viewed the evidence. As I've been saying on this here internet for 15 years or so by now. Europe just ain't an optimal currency area. Therefore it should not have one currency.

Don't fear immigration from Romania and Bulgaria

Barely a week goes by without some politician or newspaper warning of an imminent immigration apocalypse after the expiration of temporary immigration controls on Romanian and Bulgarian workers in 2014. They predict unprecedented strains on housing, welfare and the NHS – not to mention a coming “crime wave”.

Examining the profiles of migrants from these two countries currently living in the UK, as well as survey evidence from potential EU migrants, it becomes clear that such doomsaying simply isn’t accurate. As is typical for new migrant groups, Romanians and Bulgarians already in the UK are predominantly young and have small families; as a consequence of this demographic profile, they are statistically far less likely to “have a significant impact on health services as a whole”.

The demographic make-up of potential Romanian and Bulgarian future migrants is, according to a BBC survey conducted earlier this year, extremely similar. Research also strongly indicates that EU immigrants are significantly less likely to claim benefits or social housing compared to UK natives.

As for the numbers themselves, several factors point to some of the more outlandish predictions as being without factual basis. Remember that it is not just the UK, but the entire EU, that will have lifted previous restrictions for 2014. As the Oxford Migration Observatory explains, “the UK might not be uniquely attractive to migrants who would have similar labour market access in other major EU economies like Germany and France”.

Indeed, historically, the UK has not been a strongly favoured location for Romanian and Bulgarian migrants, who often prefer the cultural similarities and pre-established personal networks in countries such as Spain and Italy. The falling unemployment trends in both Bulgaria and Romania weaken claims that joblessness will be a major factor in encouraging migration from these two countries to the UK. 

Immigration is a net fiscal benefit to OECD countries; the hysteria directed at potential Romanian and Bulgarian migrants to the UK is counter-productive in the extreme.

Skwire's First Law

I would like to introduce you to Skwire's First Law:

Politicians are asshats.

We should note that there is no Skwire's Second Law.

In somewhat more detail:

And I want to talk about how Skwire’s law—though simply expressed—is not merely a sigh of exasperation, a political version of “boys will be boys.” It’s a manifesto condensed into three words.

Saying that politicians are asshats means that you acknowledge the deep truths of public choice theory. It means that even if the occasional politician supports a policy you like or gives a speech you admire, you know enough not to turn him or her into a hero. We can debate, as my friends and I have on Facebook, whether asshats become politicians or politicians become asshats. I don’t think that debate much matters, because I think both parts of it are true. Politics is a machine that turns good people and good ideas into bad ones, and turns bad people and bad ideas into worse ones.

Politics is a system that attracts not only people who want to help, but people who want to control. And once those people—good or bad, helpful or controlling—are in the system, they use it to further their ends. And that means that they will take money from people most of us wouldn’t shake hands with. And that means that they will tell us that they do not believe in spying on the American people or in a government that operates in secrecy, while they continue spying on the American people and locking up or hounding anyone who questions that secrecy. And that means they will tell us they want to help care for the helpless while they make it illegal for charities to feed the starving. And that means they will tell us they are deeply concerned about unemployment while they raise more and more barriers to entry-level jobs. And on and on.

None of this is accidental. None of this is a flaw in the system. This is how politics works. And this is why politicians are asshats.

This is clearly and obviously true in its entirety. However, we do have this problem that there are some things that must be done. There are even some things that must be done that must be done by government: they simply require the monopoly of force and legal pressure that government alone can provide. There are even some thing that it is highly desirable that government should do: the provision of certain public goods comes to mind, the intervention necessary to deal with certain externalities perhaps.

But the fact that governments are led by politicians, that politicians are asshats, means that we want government only to be doing those things that both must be done and can only be done by government. We'll get on with the rest of our lives, that vast majority and very extensive part of the rest of our lives, entirely free from the influence of asshats.

If you would be so kind that is.

It's been remarked that pre-1914 the only regular contact with the State the average Englishman had was with the local bobby and the postman. Sounds about the right sort of level really, although now that we know how to privatise the postman perhaps even that was too much.

Why we're hoping the wisdom of crowds can beat Mark Carney

Today we've launched two betting markets to try to use the 'wisdom of crowds' to beat government economic forecasters. Here's the press release we sent out:

The Bank of England’s economic forecasts have been wrong again and again. To counter this, the free market Adam Smith Institute is today (Wednesday 28th August) launching two betting markets where members of the public can bet on UK inflation and unemployment rates, taking the government’s experts on at their own game. The markets are designed to aggregate individual predictions about the economy’s prospects to use the ‘wisdom of crowds’ to beat the predictions of government experts.

The launch coincides with Mark Carney’s first major speech as governor of the Bank of England and follows his announcement earlier this month that the Bank will consider both inflation and unemployment when deciding monetary policy.

The markets (which will be run by bookmaker Paddy Power and can be accessed here) offer these odds:

UK Inflation on 1st June 2015 7/1 - 2% or Less 3/1 - 2.01 - 3.00% 9/4 - 3.01 - 4.00% 5/2 - 4.01 - 5.00% 7/2 - 5% or Greater

UK Unemployment rate on 1st June 2015        9/2 - 5% or Less 3/1 - 5.01 - 6.00% 15/8 - 6.01 - 7.00 % 5/2 - 7.00- 8.00% 5/1 - 8% or Greater

Bookmaker odds tend to be far more reliable than expert opinions about sports, politics and the Eurovision Song Contest, because betters have a strong financial incentive to bet in a dispassionate way and betting markets collect the judgments of thousands of different people, eliminating individual biases.

Even if no single member of the public can beat the experts, collecting the local knowledge of thousands of people in betting markets allows for a much broader set of data points, weighted according to the strength of people’s beliefs. The Office for Budget Responsibility already collects around two-dozen expert predictions, but this is nothing like the kind of volume needed for the ‘wisdom of crowds’ effect to take place.

These markets follow the CIA’s attempts to use betting markets to anticipate geopolitical crises, which were short-lived because of public objections. In future, the Adam Smith Institute will use these markets to compare betters’ judgments about the direction of the economy to those of government forecasters.

Sam Bowman, Research Director of the Adam Smith Institute, said: “No individual can know enough about the economy to make a really reliable prediction about it. By combining the local knowledge of thousands of people, betting markets can outpredict any panel of experts. If these markets catch on, the government should consider outsourcing all of its forecasts to prediction markets instead of expert forecasters.”

Rory Scott from Paddy Power said “Mr Carney – forget your fancy financial models; let’s see where the great British public put their pound instead. Failing that, perhaps the solution to topping up the Bank of England coffers is to take advantage of Paddy Power’s 7/1 for inflation to be 2% lower come June 1st 2015.”