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

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

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

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

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

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

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

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

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

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

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

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

Which groups are most affected by minimum wage increases?

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

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

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

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

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

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

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

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

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

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

We confess to finding this amusing rather than worrying

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

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

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

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

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

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

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

Coal kills people apparently - sadly, so does everything else

What is assumed to be a top and trumping argument from Australia:

Coal kills people. This isn’t even slightly scientifically controversial.
From the mines to the trains to the climate disruption; from black lung to asthma, heat stress to hunger, fires to floods: coal is killing people in Australia and around the world right now.

Yet we are once again having what passes for political debate about extending the life of coal-fired power stations and, extraordinarily, building new ones.

It's entirely true that the mining of coal, the use of it, does indeed kill people. But this is not a top and trumping argument, because everything kills people. Solar power kills people, nuclear does too (rather fewer in the second case but still), hydro has killed hundreds of thousands in catastrophic failures, people have been falling off windmills since at least the 12 th century AD in Western Europe when the technology first arrived.

Not having energy also kills people. Having only expensive energy kills people.

Every method and mode of producing energy kills people, every method of organising the economy kills people as does not having an economy organised in any manner, every mode and method of life kills people too. What matters is which kills the fewest and the answer is that, yes, coal kills people, rather fewer than not having any energy. That's actually our entire problem with climate change, that emitting or polluting energy sources have their downsides, but so does no or expensive energy.

But we would really reserve our ire for this misunderstanding:

In capitalism, we have created the first social organising principle based on selfishness, the first system to make greed, competition, non-cooperation its credo.

Capitalism, or if you prefer, global markets - which is what is being complained about here - enables the some 5 billion of us (some 2 billion are still as yet, and sadly, not quite plugged into the global economy) to cooperate with each other to our ever greater enrichment. To insist that the one system which enables that widespread cooperation is based upon non-cooperation is indeed a misunderstanding. Perhaps one so egregious that it rises to the level of idiocy.

Airbnb and discrimination

I have repeatedly blogged about discrimination, especially against women and non-whites in labour markets. On raw numbers we often see different outcomes between groups, and since we know that discrimination goes on, we often instinctively attribute these "gaps" to discrimination, as Tim Harford does in an otherwise nice piece here. But once we dial down and get more detail, the gaps often evaporate—the more employers or clients have about individuals, the less they use averages about groups.

Three recent papers looking at room rental service Airbnb find things that point towards a similar conclusion. The first, by Ben Edelman, Michael Luca and Dan Svirsky (pdf) finds that applications from guests with distinctively African-American names are 16pp less likely to be accepted. It looks like an instance of straightforward discrimination, but the authors don't test for alternate possibilities (e.g. controlling for crime rates or socioeconomic status what is the effect of race), so it's impossible to say for sure. However, they do find that African-American hosts accept African-American applicants at the same rate as white hosts, implying sheer racism is unlikely to be the explanation—although of course it very reasonably may not feel that way to black Americans unable to find a room.

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A second paper, from Morgane Laouénan and Roland Rathelot (pdf), also finds a raw gap between races, but they have the sorts of data that can distinguish between bigotry and statistical discrimination. Guests demand ethnic minority hosts' apartments less—resulting in prices 3.2% lower on average—but when minority hosts have reviews on the system this gap mostly goes away. It is not completely overturned, and guests do seem to have some sort of "taste" for same-ethnicity hosts, but this forms a relatively small portion of the gap, less than a quarter. They hypothesise that an even better feedback and information system would narrow the gap further.

Finally, a third paper, from Ruomeng Cui, Jun Li, and Dennis J Zhang (pdf) finds the same thing. Absent reviews, people discriminate against groups based on lower intra-ethnic trust, and facts like average crime rates. But as reviews accumulate—even bad ones that are not that bad—the gap falls towards zero. They call on platform owners like Airbnb to more strongly motivate reviewing to add information and shift judgements from "coarse grained" info like averages towards things centred on the individual.

As I said above, statistical discrimination may not feel fair. Yes, it's based on true facts (or it's driven out) and yes it's efficient (in the absence of better info), but it still judges you not like an individual, but like an average of your observable characteristics. But, satisfyingly, increasing info seems to work, driving out even statistical discrimination through robust endogenous incentives. People aren't incorrigibly discriminatory, they just need more data.

Immigrants are taking our jobs, but..

The government has targeted low-skilled workers in the recently leaked government papers, suggesting a restriction on the amount of foreigners in low-skilled occupations. The paper insinuates that low-skilled immigrants are not valuable to the country because they don’t make existing residents better off. The argument consists of beliefs that UK wages are being driven down and that UK jobs are being taken away from natives. This is a common fallacy in the public debate and I beg to differ. Here’s why:

A paper from 2016 written by Mette Foged and Giovanni Peri looks on the longitudinal data from the period 1991 to 2008. Throughout that period, Denmark experienced an immense inflow of low-skilled workers from Bosnia, Somalia, Iraq and Afghanistan and it therefore gives Foged and Peri a good foundation to assess data from this period.
The three main findings in their analysis are as follows:

First, the increase in refugee-country immigrants pushed less educated native workers to change occupation. [...]  Second, less educated natives experienced positive or null wage effects and positive or null employment effects. [...] Third, as we compare a cohort-based analysis and an area-based analysis we find that the direction and magnitude of the effects on native outcomes are similar using either method and the wage and specialisation effects persist in the long run.

Nonetheless, it’s true that immigrants are taking native jobs. However, it’s not because of the reasons normally stated in the public debate. Rather, it’s because immigrants basically forces natives to be mobile and specialise themselves and thus gain entry to a higher paying job. Therefore, immigrants are stepping onto the lowest step on the ladder while pushing the natives upwards in the process.

Although, the paper states that there is not necessarily a positive change in natives’ wages, but there is not necessarily a negative effect as well. If there are any positive effects, they occur after three years and are permanent afterwards.

The reason for this potential gain in wages is explained in another paper and is complementary to the paper referred to above.
It too suggests that native workers are able to generate higher wages through specialization. According to this study, production consists of different kinds of skills. Immigrants who are less educated have a comparative advantage when it comes to physically demanding tasks, whereas natives of the same level of education have an advantage in tasks demanding better communication and language skills. Therefore, when the increase in physical labour supply pushes native working to a job demanding better communication and language skills, the natives are rewarded through their wages.

As it turns out, immigrants can in fact be an asset in the future and make the current residents better off. The leaked government proposal therefore seems to be projected at addressing the concerns of the public rather than actually looking at the reality of things.

Our Executive Director, Sam Bowman, wrote an article on this a few years back. If you enjoyed this piece, have a look at his piece as well.

The right is to blame for the proliferation of dangerous leftist eco-nonsense

“This changes everything” is perhaps the leading siren call in the face of climate
change. For a certain sub-genre of leftist, the existence of environmental issues
means only one thing. Capitalism, modernity, growth, consumerism, and
industrialism are to blame, and a paradigm shift is necessary to save humanity
and the earth. We must embrace a zero-growth, or even degrowth, economy with
significant central planning and curtailment of consumption. The alternative is
global catastrophe.

This is, of course, absolute nonsense. As Tim Worstall has pointed out in
response to George Monbiot’s opportunistic take on Hurricane Irma, a grandiose
quixotic paradigm shift in values and economic organisation is entirely
unnecessary. The answer to climate change, and indeed pollution, lies in the
market price system generally and intelligent policy, such as a carbon tax,
specifically. Other free market policies, such as deregulating nuclear energy and
removing subsidies for fossil fuels, are also viable and important tools for
mitigating climate change. Likewise, imposing specific environmental
regulations does not amount to “changing everything” much as banning dumping
toxic waste in rivers is not some kind of refutation of the profit motive.

These are not merely alternative solutions to the problem. The puritanical-
luddite route of demonising consumerism is a grotesque vision, even if it could
work. Whilst the likes of Monbiot may relish a poorer, more regimented, and
guilt-fetishizing world, I’d suggest that most people would not. In any case, even
if prices cannot take account of environmental risk this is no way implies that
central planning has been vindicated. In lieu of prices there is no way, at all, of
assessing value at an economy-wide or global level, let alone of organising
efficient allocation.

So, why do the worst kinds of environmentalism gain so much traction? Simply,
for far too long, far too many on the right have endorsed or enabled denialism
and a caricatured version of the case for free markets. I dislike the term “market
fundamentalism”, but the resistance of some libertarians to any role for
government has caused significant damage to our cause. Pigouvian taxes to
internalise and correctly price externalities are not socialism or anathema to a
free market economy. Preventing or reducing activities that impose on and harm
others is not a violation of self-ownership or inherently illiberal.

Some measure of skepticism regarding climate change is not necessarily
misguided. When data was less comprehensive and there was less of a scientific
consensus, it was right to treat claims of catastrophe with caution. Likewise, the
fact that there is a serious risk of environmental damage does not mean that any
proposed solution should just be accepted without taking account of other
factors, such as the wider economic implications of said policy. Nevertheless,
verging into conspiratorial thinking and amateur attempts to debunk the bulk of
climate science is in no way laudable.

Failure to engage with addressing, and minimising the magnitude of,
environmental problems is, of course, damaging in its own right. It has also left
the door open for uninformed and outright dangerous agendas, which gain
traction in a relative vacuum. Making the case for serious solutions that are
compatible with prosperity and liberty has been made considerably harder by
this context.

If only Britain had done what Germany did we'd have beaten homelessness

Lynsey Hanley tells us all how appalling the rise in homelessness in Britain is. Apparently it's all entirely the Tories who actively desire the poor, addicted and mentally addled to suffer. We think that might not be the whole and entire truth to be honest.

One little part of this analysis did catch our eye though:

As long ago as 1993, researchers at the Joseph Rowntree Foundation, in a report tellingly titled Making It Happen: Finding the Resources for Social Housing, noted that 600,000 more homes would have been built in Britain during the 1980s had we invested the same proportion of GDP in housebuilding as West Germany did during the same period.

It's entirely true that West (or as is now, all of) Germany has a rather different structure to the housing market. And calling forth more investment into housebuilding doesn't seem a bad idea to us at all. So, how is it that they've done it? 

Well, the first part is that the planning system is generally, even if not quite exactly, "can build." If you own a piece of land then the presumption is that you may build upon it. There are certain things you may not do, of course, but the generally underlying idea is that within those constraints one may. That is, instead of asking permission to build the system is much more sure, you can build, but not this or this.

The second part is that there is a much larger rental sector. No, not a much larger social rented sector, a much larger rental one. Much of which is (page 5) small landlords with one or three units rented out. Or, to translate that into the British vernacular, buy to let landlords. Even the IPPR has been known to note these things.

So, let us indeed take that example of Germany, a place which has built, as Hanley says, sufficient housing for the populace. They've done it by never having the Town and Country Planning Act and by not just allowing but encouraging the petit bourgeois (even haute bourgeois, if you prefer) idea of private landlordism.

All of which might be something of a clue as to how to deal with Britain's problems. Except, of course, for the sad fact that everyone shouting about the problem, including the very Hanley who draws our attention to Germany, insists that those are the very two things that we must not do. That is, having pointed to a solution they are insistent that we must not apply that very solution they are pointing to.

Politics is a funny thing, isn't it? 

A fascinating result from China about economic mobility

As we all know the Chinese communist revolution entirely appropriated all private wealth. As we all also know it has been possible once again, for these past few decades, to make private wealth again. We've thus a good test of that old question, is it simply happenstance that some people have more wealth than others or not? 

That is, once the redistribution has happened do we get the same old people accumulating the wealth again or is it some completely different group that then prospers? A claim at least of an answer out of China:

Virtually every Chinese millionaire or billionaire is self-made because capitalist reforms to the centrally planned communist economy only began in the early 1980s and did not really take off until the 1990s. But the modern super-wealthy often turn out to be descended from an earlier capitalist class. Richard [Liu] is no exception. Before the 1949 revolution his family were wealthy shipowners who transported goods along the Yangtze river and the ancient imperial canal from Beijing in the north to Hangzhou in the south. They lost everything when the communists took over and were forcibly resettled at least twice. One academic survey found more than 80 per cent of Chinese “elites” (those with income at least 12 times higher than the average in their area) are descended from the pre-1949 elite. Richard puts this down to “family culture”.

“My parents and grandparents taught us a lot — not Chinese or maths but a sense of values, of how you should be and how you should treat others,” he says. They also drilled into him the knowledge they had once been very rich but everything had been taken away — a lesson all too relevant even now.

Do note that no one is saying that it's genetics or anything so immutable, only that it is the basic culture, the familial upbringing if you prefer.

It's an answer to the question, one of the very few that we've got in any empirical sense, so sad that it's not the one that the redistributors are likely to want to hear. That there is something distinctly non-random about who ends up with said wealth.

The one single economic fact we have to explain

There's a new, and free, economic textbook out there, coming from the Core project. David Henderson likes some of it and not other parts. Which is or course just how it's going to go, no one is ever going to get the entire subject between the front and back of just the one book, that's why we've libraries packed with nothing but the subject.

However, it does place useful emphasis on the one single economic fact we've got to explain, in this chart here and used above as our image. If you want the numbers themselves then Angus Maddison is a good source. This thing we've got to explain being the economic hockey stick.

Starting around 1750 something began to happen to living standards in Britain. They started to rise, substantially, for the common man, and sustainably. This is something that had never happened before in human history. The unique occurrence then became less unique, the system which produced it, whatever that system was, spreading and producing the same or similar rises wherever it spread to.

This process is still going on - what we today describe as absolute poverty, that $1.90 a day out there, is roughly and around and about what historical living standards were before this unique occurrence, everywhere.

As the economic historian Brad Delong has been saying these decades, as Dierdre McCloskey has been emphasising, this is the one great fact we have which must be explained.

Of course, we have different names for this, the Enlightenment, the Industrial Revolution,   capitalism perhaps, the destruction of the guild economy and its replacement with free markets possibly. We could also call it the increased immiseration of the proletariat, the greater exploitation of the worker by the employer, as indeed some do. 

But we're still left with this one fact. Human life, in material terms, started to get better for the first time as a result of this occurrence. And no economic explanation, indeed no explanation of any sort, which cannot explain why this did happen is of any value at all.

This is not to say that our explanation has to detail why at this time in this place, not at all. But it does have to explain to us why living standards, for the first time ever, started to rise. We've thus a handy shorthand by which to measure economic, or any other, explanations. If they tell us why we've gone from $2 a day to $100 (yes, obviously, after inflation) then they might have some element of the truth to them, if they do not then they can be rejected immediately.

That this change has only ever happened in places with some modicum of capitalism and markets does indeed make deciding upon the merits of the varying explanations rather easier.