It’s all been said before

Working in free market economics can sometimes feel as if one is merely writing footnotes to an 18th century Scot.  Pretty much anything worth saying has already been written by Adam Smith, and often all that we can do is collect some more evidence, quantify the effects that he predicted, or apply his wisdom to the modern world.

Maybe that explains some of the wilder economic theories of recent decades; some people will write anything, no matter how daft, just to try to be original.

But in my field of tax, it turns out this feeling that it’s all been said before is even older.  Never mind the 18th century; the basic economics of business tax was summed up in the 1500s:

“Taxes and imposts upon merchants do seldom good to the King’s revenue … the particular rates being increased, but the total bulk of trading rather decreased.”

That was Sir Francis Bacon, lawyer, politician and scholar under Elizabeth I and James I, credited with being one of the founders of the enlightenment, scientific method, the modern approach to the common law, and America.

As with Smith on economics, what more is there to say on business taxation that does not merely expand on what Bacon wrote over four hundred years ago?  If you tax something, you have less of it.  If you tax business, even though the Treasury may see a direct benefit, the indirect effect is that the whole country is made poorer.

It sums of most of the few things we know for certain about tax.  What matters isn’t who actually pays the tax and how much is collected, but what the wider effects are; what economic problems does the tax cause and who bears the cost of those?

And Bacon had grasped a fact that seems to have eluded many campaigners today; different taxes have different effects, and taxing businesses is one of the most economically damaging ways for a government to try to raise revenue.

With business tax, we know that the vast majority of the burden of the tax falls not on business owners but on workers, as higher taxes result in less investment into business, and therefore fewer jobs are created and those that are tend to be less productive and so lower paid.

Second order effects, the incidence of taxes, endogenous growth theory, the Laffer Curve, negative externalities, optimal tax theory; the phrases weren’t invented but the concepts were all there in one paragraph, in the writings not of a modern academic but of an Elizabethan courtier.

Still, at least in tax the work was only done four hundred years ago.  Pity those negotiating post-Brexit trade deals, where the definitive treaty on international trade was signed eight hundred years ago:

“All merchants shall have safe and secure exit from England, and entry to England, with the right to tarry there and to move about as well by land as by water, for buying and selling by the ancient and right customs, quit from all evil tolls”

Magna Carta of course.  That’s import duties dealt with as well; is there anything left to write about?

A bold move for Britain

One of the campaign pledges made by Donald Trump was that he would renegotiate the North American Free Trade Agreement (NAFTA), which came into force on January 1st 1994.  Basically it involves free trade between the United States, Canada and Mexico.  Canada's Prime Minister, Justin Trudeau, has declared himself ready to renegotiate the treaty.

This gives the UK a great opportunity to extend free trade in the aftermath of Brexit. The UK could apply to join the renegotiated NAFTA, taking part in the negotiations to hammer out a new treaty that included the UK.  It would then become the North Atlantic Free Trade Agreement, but would keep the NAFTA acronym.

Several influential Conservatives have indicated that there might be opportunities for closer transatlantic economic ties.  Indeed, Sir John Major floated the idea during his premiership.  It would give the UK a head start in its bid to launch bilateral and multilateral free trade deals once free of the EU's protectionist grip.  And it would make nonsense of the always absurd notion expressed by President Obama that Britain would be "at the back of the queue" in any trade deal with the US. 

Prime Minister Theresa May is expected to use her Lord Mayor's Banquet speech to declare her support for free markets and free trade.  A move toward joining a revised NAFTA would underscore that commitment and give people confidence that she meant it.

Not one pound, not even one penny

We've mentioned before that we think that leaving the EU is a great opportunity for us to properly sort out British farming. Wean it from the teat of subsidy that is, go the full New Zealand and offer not one pound, not a penny, as subsidy to farmers.

It would appear that the likely next leader of the NFU has got some of the message:

Farmers will lose most of their direct subsidies after Brexit and must do more to prove that any remaining support delivers public benefits, a farmers’ leader has said.

More than £2 billion a year is paid to farmers based on the amount of land they own but Minette Batters, deputy president of the National Farmers’ Union, accepted that these payments would all but disappear once Britain left the EU. The National Trust and many campaign groups have already called for an end to these “basic payments”. Ms Batters revealed that the farming industry also accepted the need for radical reform of subsidies.

That's nice but not good enough. There should be no subsidies whatsoever. Needless to say The Times doesn't agree:

Subsidies should be scrapped altogether when Britain leaves the EU, this argument runs, since they only prop up failing businesses. That would be a mistake. Many farms, particularly hill farms and small farms in Scotland, Wales and Northern Ireland, would no longer be viable. Large rural areas would be overtaken by brambles, thistles, nettles and scrub. Productive potential would be lost and landscapes sullied. Emissions would rise as Britain sent lorries and aircraft to fetch food from abroad. Prices in the supermarket would shoot up too. That hits the poorest hardest, as more of their income goes on food.

This is to miss the point that subsidies come from somewhere. Taxpayers cannot be made worse off through rising food prices if they also don't have to pay the subsidies at the same time. However, it's here that they are truly in error:

 The CAP’s main condition is on land ownership: the bigger the farm, the bigger the subsidy. Ms Batters reckons that this is unlikely to go on after Brexit. Neither should it. Bigger farms are normally those least in need of the subsidy to survive. Supporting smaller farms also avoids mass consolidation which narrows the gene pool and renders crops less resilient against disease.

The focus should be on providing farms of all sizes with the capital to invest in more productive equipment and training to use it.

Sigh. Subsidy to the simple ownership of land just increases the capital value of that land as David Ricardo pointed out that it would. not having such subsidies would therefore lower the price of farmland. And a lower cost of farmland reduces the amount of capital needed to be a farmer - thus neatly providing farmers with more capital simply by abolishing the subsidies.

Our very demand, the removal of all subsidy, would produce the very thing The Times desires, more capital for farmers.

We've got to get this right about the robots stealing all our jobs

Another one flowing from that assembly line of pieces mithering about what will happen once the robots steal all our jobs. And this is one area where we might hope that automation will indeed take over, and quickly too, because we should assume that machine learning will lead to the fully automated version being correct.

Automation does not lower the price of labour, automation raises the rewards to labour:

To sample what lies ahead, my colleague Ryan Avent in his book in automation’s impact, The Wealth of Humans,tried out a computer program that copied complex analytical journalism. Happily for my trade, the result was not a must-read. Yet even if we columnists are not yet to be displaced by some offspring of Sophia, with an expertly engineered prose style, it’s a safe bet that some parts of many jobs will be altered or eradicated by automation much faster than we reckoned on or find comfortable. A report for the World Economic Forum estimated that technology would create about 2m jobs by 2020 worldwide, but displace 7m.

For the educated and financially secure, this causes apprehension enough. Now imagine you are either without a job or in low-paid, patchy work, in economies facing the resulting efficiency gains but lowering the price of labour and wearing away workers’ bargaining power.

I think we'll all agree that the world is rather more automated than it was 240 years ago, when Adam Smith published WoT? And I think we'd all agree that labour is paid rather more today than then? Thus what is going to be our first pass attempt at portraying the relationship between automation and the rewards to labour? More means more, right? 

In more detail we could take Paul Krugman's explanation. The average wage in an economy is determined by the average productivity of labour in that economy. Up goes the productivity and up goes the wage - automation increases labour productivity.

We can even dig right down into the details and consider why a barber in Nuneaton makes a higher income than a barber in Nairobi. Both are doing the same task using the same technology with the same level of productivity. But as William Baumol's cost disease argument points out, the higher productivity of the alternative uses of that labour pull up that barber's wage. 

And it really is that alternative use of the labour which determines the general level of wages. And as automation makes the labour running the machines more valuable so does the real wage rate rise.

As it must do of course - because now we've the machines making myriad things which must be consumed, we humans are the only people who can do the consuming and thus we get to consume more. Our real wages have risen.

Shocker as government decides to spend money effectively and efficiently

We do think this is a very odd thing to be complaining about. Then again, it's from ResPublica, who do tend to complain about odd things.

The problem is that Heseltine’s panel has, on average, just £1.4m for each initiative it supports. To put that into context, the first phase of regeneration of Sheffield’s Park Hill estate required £39m of public funding and redevelopment of the Castle Vale estate in Birmingham was made possible by £198m of government support.

The current onus on commercial viability is likely to mean densifying estates and using new home sales to fund wider redevelopment. There is a real danger that this will entrench the north-south divide, leaving behind those places outside London and the south-east where redevelopment of this kind is not commercially viable, or where bricks and mortar regeneration is not the answer to concentrations of multiple disadvantage.

"Commercially viable" is just another way of saying effective, or efficient. So, the complaint is that government is gearing up to spend our money in an effective or efficient manner. Which really is an odd thing to be complaining about.

We are aware of how taxation works - we raise it where we can, spend it where we must. It is not true that tax raised in London, by far and away the major tax paying area of the country, should be spent in London. But that "must" in where we spend it means that it should be spent where it produces the most value.

And that means, if we're going to be talking about buildings, we spend the money where the valuable ones are - in London. This way we get the most bang for our buck, pop for our pound.

Another way to look at the same point is to note that there are parts of the country where people simply do not care to live. Well, OK, the people have spoken, what's the point therefore of spending fortunes of other peoples' money on places where people do not wish to live? 

Peak globalisation?

"Peak oil" was always a myth.  The notion that the world might eventually run out of it ignored how markets work.  When demand of a commodity exceeds supply prices tend to rise, leading people to use less of it and to develop substitutes.  Barely had the printer's ink dried on "peak oil" stories when hydraulic fracturing unleashed vast quantities of shale oil and more importantly, the less polluting shale gas.  Developments in photovoltaic solar power and battery technology make it more likely that oil will be left in the ground by mid-century, rather than disappearing altogether.

The notion of a "peak" is a useful one, however, if it is used like the phrase "high water mark" to denote that something which was once advancing is now diminishing from its highest advance.  Globalization has been advancing across the world for decades.  It has brought millions of people in poorer countries into the world economy, and has created wealth on a scale never before seen in human history.  It has benefitted poor people most, advancing global GDP per head nearly as much in 25 years as was achieved in the previous 25,000 years.  During that time global poverty was reduced from 37% of humanity to less than 10%, and world under-nourishment has been halved.

Yet there are signs that the advance of globalization might not continue as it has done.  There seems to be increasing resistance at political and popular levels to free trade deals negotiated between groups of countries.  The Comprehensive Economic and Trade Agreement (CETA) between the EU and Canada took seven years of painstaking negotiation, and was even then nearly forestalled by the Belgian Wallonia Parliament.  It took days of frantic dealing to finally clinch the deal.  The Trans-Pacific Partnership (TPP) of 12 Pacific Rim Countries was signed in February 2016, but will not come into effect until it is ratified.  As time passes it looks less likely that it will be. 

Negotiations to secure the Transatlantic Trade and Investment Partnership (TTIP) to secure freer trade between the US and the EU seem to have run into the ground, with several European ministers describing the deal as dead.  It seems unlikely that it will go ahead.  If President-elect Trump meant what he said, even the North American Free Trade Agreement (NAFTA) will be up for renegotiation, and is likely to become less free.

Where once the prospect was of more and more countries committing themselves to free trade with each other, the agreements that would enable this are proving more elusive than expected, and resistance is mounting.

A similar effect can be seen with respect to the free movement of labour.  Countries which once signed up to the practice of allowing foreigners entry to live and work within them are showing increasing reluctance to the idea.  Some are limiting numbers, some are raising barriers.  In many countries resistance among the domestic population has forced politicians to withdraw support for free movement and to advocate stricter border controls.

The vision of a world in which goods and peoples can move freely cross borders is looking very much less likely than it once did to come about.  It may well be that the globalization of the world's economy, a factor that has multiplied wealth in so many places, has reached its peak and is starting to recede.  If true, this will present tough challenges for the UK as it leaves the protectionist bloc of the EU and moves to negotiate wider free trade for itself with non-EU countries.  It may well find itself moving against a tide flowing the other way, but even if this is true, it should not weaken our resolve.  We can become richer through free trade even if parts of the world retreat into a nationalistic protectionism.

Fawcett Society falls foul of Barbie's problem - math is hard

The Fawcett Society tells us that yesterday, Thursday, was Equal Pay Day. Women earn, on average, less than men, therefore women will be working for the rest of the year for free.

Women will in effect work for free for the rest of the year because of the gender pay gap, which will take 60 years to close at the current rate of progress, campaigners say.

The Fawcett Society called for more action from the government and employers to tackle pay discrimination, job “segregation” and help women into senior posts.

Thursday has been labelled equal pay day (EPD), with the society saying the 13.9% pay gap means women are in effect working for nothing from now until the end of the year.

There is a problem with this calculation. Their basis is this:

EPD is calculated using the mean full time gender pay gap , which is currently 13.9%.

We have been through this a number of times over the years. Sir Michael Scholar, of the UK Statistics Authority, was most insistent upon the point in a couple of letters.

We must, when discussing this point, use the median full time pay gap, not the mean. That median is currently some 9.6% or so.

What this means is that the Fawcett Society is protesting on the wrong damn day. This is quite apart from the fact that the remnant pay gap is about the choices made by parents over who is the primary child carer and pretty much nothing else.

The upside of Trump

The upside of Trump

Before the American election, the Brookings Institution predicted that a Trump victory would wipe 10-15% off the value of the S & P 500 share index. This turned out to be wrong: in fact, share prices rose strongly, reversing an initial 5% crash to finish the day at an all-time high. And note that, unlike the FTSE rise after Brexit, this is not being driven by a collapsing currency.

What’s going on here? I, like Brookings and most other people, did not expect this. In fact I expected economic apocalypse if Trump won – akin at the very least to the Brexit crash, if not on a par with the bubble crash. Trump made economic and labour protectionism the central theme of his campaign, both of which we would normally expect to hurt the economy and hence the price of company shares.

So this offshore tax evasion isn't a major thing then?

We think this is an interesting little snippet of news:

Twenty-two people face civil and criminal investigations into suspected tax evasion following the disclosure of the Panama Papers, the chancellor has told MPs.

Philip Hammond also said a further 43 wealthy individuals were under review while their links to the offshore files were investigated further. He made the comments in a written answer to the House of Commons explaining what had happened since the offshore tax files emerged.

A whole 22 people, eh?

This is the result of the largest data dump in history (copyright The Guardian), entire forests were levelled to provide the newsprint to report on it and we've got the goods, the evidence, that an entire 22 people have been naughty little boys'n'gals?

This is, quite literally, the same sort of number as those struck by lightning each year in the UK.

No, we're not arguing that offshore tax evasion is good, quite apart from anything else it's illegal. But it's not actually obvious that it's a major problem, is it? 


Elections do not give you the wisdom of the crowd

In his column on Monday, Matt Ridley argues that a majority of voters tend to come to the right answer surprisingly often, and even beat the experts.  The mileage you give that view will likely vary depending on what you think of Trump and Brexit. But what's interesting is why he thinks this. Ridley argues that elections benefit from something known as the wisdom of the crowd, he writes:

‘In these democratic days, any investigation into the trustworthiness and peculiarities of popular judgments is of interest.' So begins an article entitled Vox Populi, which is not about Donald Trump but was published in 1907 by Francis Galton, a pioneer of statistics, by then 85 years old. He had analysed the results of a sweepstake competition held at the West of England Fat Stock and Poultry Exhibition in Plymouth.
An ox was on display. Visitors could buy a postcard for sixpence and write their guess as to the weight of the ox, once slaughtered and dressed. Of 800 cards filled out, Galton rejected 13 as illegible and averaged the rest. The arithmetic mean of the 787 guesses came to 1,197lb. The true dressed weight of the ox was — yes — 1,197lb (Galton reported slightly different results, but recent reanalysis by Kenneth Wallis of Warwick University finds the match was exact).
The message is that a crowd is at least as wise as any expert (only one guess was spot on). In a large group of people, ignorance in one direction cancels out ignorance in another."

It's a delightful story and arguably one of Galton's most interesting discoveries (arguable because as Scott Alexander points out Galton gave us "several statistical tools including correlation and standard deviation, the use of the survey in data collecting, the term “eugenics”, the entire science of meteorology, hearing tests, the first study on the power of prayer (he prayed over random fields to see if the crops there grew higher; they didn’t), fingerprinting, the scientific investigation of synaesthesia, and a horrible warning about how not to do facial hair"). 

Ridley points to another area where the crowd beats individual experts – markets. They tend to outperform individual forecasts with remarkable–but not perfect– accuracy. It's why we at the Adam Smith Institute argue that monetary policy shouldn't be determined by a panel of wise men and women, but by a Nominal GDP futures market.

But there's a problem.  Contrary to Galton's example, in elections a voter's ignorance in one direction doesn't cancel out ignorance in another. Suppose that there was some sort of systematically incorrect belief that Oxen were 50lbs heavier than they actually are; maybe the guessers were primed with stories about heavy oxen. If that was the case then the mean guess would no longer give you right answer.

I think that this is probably the case with voting. Bryan Caplan in his excellent book The Myth of The Rational Voter lists four biases (it might be better to think of them as strong errors) that systematically lead voters to make a sub-optimal choice.

First, there's the make-work bias. People tend to confuse economic growth and job creation, but most of the real benefits of economic progress come from saving labour. It leads voters to favour government programs that make-work to the most economically beneficial ones.

Second, you've got the anti-foreign bias. People significantly underestimate the benefits of free trade and migration. Trade is often phrased as zero-sum with winners and losers (note Donald Trump's insistence that China's killing America by providing US Businesses with cheap steel and US consumers with cheap clothes). The reality is that trade deals are win-win, some winners are bigger than others but both sides are still winners.

Third, voters are overly pessimistic about economic conditions. Despite the tireless and highly commendable work people like Matt Ridley, voters systematically underrate the state of the economy in both the short and long term.

Fourth,  voters are systematically biased against market mechanisms. They tend to be overly suspicious of the profit motive. Caplan cites oil prices as an example. 74% of Americans blame them on greedy oil companies, just 11% of economists agree.

Ridley's right that a council of experts simply isn't as good as the wisdom of the crowd, but it's markets not elections that we'll get it from.