Entirely arglebargle from Compass here

We do not generally look to Compass, the political groupuscule, for fine economics ideas - that's not their function. They're  more a kaffeeklatsch for the wibbling middle classes in general. However, we do think we ought to mention that their latest idea is simply nonsense, entire arglebargle.

The set up is that as the machines do more then fewer people will be working and gaining incomes from having done so. As the income tax is a major pillar of the tax system this means we must tax the machines to make up for the losses of that income tax.

This is, as we say, arglebargle, complete piffle

An alternative source of tax revenue is needed. Where personal tax has been collected for over two hundred years on the backs of men and women working, now a change is necessary. Where the fruits of labour have resulted in personal tax revenues, I suggest that we now consider taxing the labour of machines, because it is machines that are increasingly producing income now. Working out how to tax machines would not be easy and implementing such a policy would be harder. The details do not need to be discussed here. They will be worked out later. Taxation could be levied on a simple unitary system and on an annual basis. Where an automatic welding machine is being used in car manufacturing it would be relatively easy to determine how many manual welders have been displaced and a level of taxation calculated.  It would be much more difficult to tax a combine harvester. How to tax an automated telephone system? How to tax a launderette? I have an abiding vision of rows and rows of copy typists in an office in the 1950s but they have all been replaced now. But difficulties should not deter a consideration of the idea. 

What is being missed is the most basic part of GDP accounting. The value of all that is produced equals the value of all that is consumed. And the value of either or both individually is the incomes of everyone.

From the first we want to have that increased production as that means that consumption can rise. Hurrah, we're richer! We thus welcome the machines as they increase production and thus make us richer, Hurrah! again.

What Compass is missing is that that increased production and or consumption is also, by accounting identity, the same as the increased incomes of all of the people. Those incomes might come as rent, as interest, as profits, as what we think of as normal income income. Thus, by definition, if production is increasing, consumption is, then so also are incomes increasing.

It therefore cannot be that there will be a tax shortfall as a result of production increasing and incomes falling. Because it is not possible for production to increase and incomes to fall. Because all aggregate production is equal to all aggregate income.

Another way to put this is that they're quite right, the machines don't get paid for producing. But someone, somewhere, does get the income from the machines' production. It might well be true that we'll not be getting the income tax from the worker (even though their contention that the displaced worker will not be working at something is wrong) but that income will be income to someone and we really do tax all incomes already.

By not understanding this, something which is explained in every A level text book, Compass have managed to recommend taxing the very thing which makes us all richer, automation. Maybe your only wibbling over the coffee cups, rather than proposing economic policy, would be safer for all of us....


We wouldn't use this argument ourselves, we really wouldn't

The intention behind the argument is just fine - let's not be protectionist over who owns companies. But we have to admit that we're not very much taken with the argument itself:

Those bloody foreigners, they come over here nicking our companies. For critics of foreign takeovers, 2016 has been the stuff of nightmares.

First brewing giant SAB Miller was snapped up by an overseas rival, and now the London stock exchange and chip-maker Arm look destined for foreign hands, much to the fury of those who believe such a fate tends to be negative for businesses and the economy.

Critics like to pretend that overseas buyers pillage Britain’s best silverware, gobbling up prized technology and scientific and industrial know-how, while shutting down factories, firing workers and eventually scampering back to their homeland with the best bits of British plc.

It doesn’t take a genius to realise that such bashing doesn’t stand up to scrutiny.

ARM was majority foreign owned before Softbank appeared. From memory some 43% US and 15% European share ownership, although this is complicated by not knowing who owns the funds that own the shares. By whatever standard we might use about foreign ownership it was thus already a foreign company.

SAB Miller is a rather different case. That's a company that was listed in London, yes, but it's not obvious that the company has anything other than the most passing interest in the British economy. The major subsidiaries are:

Bavaria Brewery
Foster's Group
Kompania Piwowarska
Miller Brewing Company
South African Breweries
Pilsner Urquell Brewery

A more detailed look at regions of operation show nothing at all in the UK. And no, UK Fosters is brewed, we're told, by someone else under licence. 

The argument we would have used is that you can't go around complaining about foreigners buying a British company which owns lots of foreign companies. For your current complaint is that the British company should never have bought those foreign ones in the first place. At which point protectionism about ownership dissolves in its own contradictions. 

This seems entirely sensible to us

Entirely sensible, that is, if we change one word of this Times headline:

Rail commuters to pay more despite overcrowding and disruption

For we really do think that would be sensible if it read "Rail commuters to pay more because of overcrowding". That being the manner in which that marvelous price system reacts to changes in supply and or demand. We would also note that we have no other method of managing, or even calculating or understanding, the interaction of the billions of objects and people within an economy than that price system itself.

More than £40 will be added to the cost of the average annual rail season ticket next year as the government prepares to increase fares despite serious overcrowding and chaos caused by striking unions.

The striking unions are a different problem but the overcrowding should be met with prices rises.

In the short term rail capacity is inelastic. Thus the solution to overcrowding cannot be the instant expansion of supply. Price rises will aid in curtailing demand, thus lifting by some amount that overcrowding. In the longer term of course everything is elastic. And price rises will increase the incentive to expand capacity and provide the finance to do so as well. Thus again reducing the overcrowding.

Rising fares in the face of overcrowding are not thus some distressing but or despite, they are the solution.

The great non-market delusion

The latest concern seems to be that people liking to eat avocados calls forth those who grow avocados:

Mexican farmers can make much higher profits growing avocados than from most other crops and so are thinning out pine forests to plant young avocado trees.

Well, yes, that is how these things work. More people consume something, price rises, people work out how to supply more of that now more expensive thing. And this new production will undoubtedly displace the production of something else.

We cannot find it in ourselves to complain about poor Mexicans becoming richer by feeding a hipster habit.

But there's worse to this thinking:

You might think, OK, I’ll buy avocados from some other less problematic source then. But would an avocado from Chile, Peru or the Dominican Republic automatically be more sustainable or equitably produced? The fact of the matter is that we know pitifully little about the environmental and working conditions of faceless people in faraway places who grow fruit for our tables, but I have seen enough of foreign fruit “farms” to suspect the worst.

At which point we have to point out that that is rather the point. That's exactly the function that markets perform for us. As Leonard Read didn't quite point out, no one at all knows how to produce an avocado.

There is no other system possible to coordinate the activities of 7 billion people than that network of prices and markets. There absolutely is no other system at all to connect more bearded wonders drinking avocado smoothies in London with farmers on some hillsides in Mexico. There is no system of government, of central direction, which could manage this.

All of which means that if you want to consume only those things which can be monitored in such a manner then you're going to have to accept the consumption of only those things which can be monitored in such a manner:

The popularity of kale, for instance, makes all-round sense. It’s democratically cheap, its nutritional benefits and locavore credentials are impeccable, and it’s cultivated easily in the UK.

Kale it is then and no doubt three months of turnips every winter.


NHS England and PrEP

NHS England has just been instructed that it is their legal duty to offer pre-exposure prophylaxis(PrEP) against HIV, to high-risk individuals, free at point of care. Media outlets left, right, and centre have come out in support of this: The Daily Mail called it an ‘HIV wonder drug’; Owen Jones wrote in the Guardian that the High Court’s decision shows that “gay lives matter”.

Indeed: gay lives do matter — so do all lives — but that is not what the decision shows, and a reversal of the decision would not imply the opposite, that gay lives do not matter (for a start, of the 103,700 with those in the condition in the UK, 52% were infected by heterosexual sex). The NHS plans to appeal the decision; its original argument against considering the drug — Truvada — for the specialised services annual prioritisation programme, was that it did not have the legal power to commission PrEP: local authorities are responsible for HIV prevention services. Moreover, the NHS feared that they risked a legal challenge from proponents of other ‘candidate’ treatments that might be displaced by PrEP. Perhaps they are right to: nine new treatments that the NHS had planned to make available have been suspended pending the outcome of this appeal. For the cost of Truvada would be considerable, depending on the parameters of the group deemed at high-risk, it could be from £10-20 million a year — £400 per month for each individual, plus the costs of prescription and monitoring. The final cost could be much higher if HIV drug-users and/or HIV positive heterosexual couples who want to reproduce were found to qualify.

The NHS is already too large — the 2016/17 budget for NHS England is £116.4 billion; part of the problem is the widening scope for healthcare. Founded in 1949 with the mandate to prevent, diagnose and treat illness, the NHS has always exceeded the its financial provisions; 1952 saw the introduction of prescription charges to limit this. But the problem has grown worse: at its inception in 1949, the NHS had declined to provide a simple circumcision due both to the cost and the non-therapeutic nature of the operation; in 2016, there are many more advanced (and more expensive) options for treatment; expected standards of living and care are higher; definitions of illness are more fluid. The NHS now pays for certain types of breast augmentation, cosmetic surgery, and gender reassignment. Although prophylaxis against HPV, another sexually-transmitted disease, is already available, it is cheap by comparison — around 0.01% of a ten year course of PrEP — and also assures lifelong protection. Providing Truveda, a much more resource-intensive prophylaxis — that involves providing continuous treatment and monitoring — would act as a precedent for future expansion, another landmark on a paradigm shift from gratitude for basic care to a sense of entitlement to the best available. The NHS are to fear challenges from individuals requiring specialist cancer or arthritis care — those challenges will be built on sound arguments.

Questions regarding the NHS’ mandate aside, what is most important for the time being is whether the treatment actually works — whether it prevents cases of HIV and in so doing saves the NHS money on treatment. The Independent is quite right in saying: “when taken consistently, [PrEP] has been shown to reduce the risk of infection in people who are at high risk by more than 90 per cent”. But in base-case scenarios this is much reduced — relative risk reduction with expected adherence to PrEP is 0.44, cutting the annual probability of HIV acquisition to 0.02. In this case, to prevent a single HIV infection, the NHS would have to treat 64 people. Where condoms are used, this number grows to 212 — estimated by a 2014 U.S. study to be a cost of $840,000 per additional quality-adjusted life year (QALY). NICE's official threshold for a QALY is between £20,000 and £30,000 (though even this has been criticised by new research that finds that spending over £13,000 per QALY does more harm than good to NHS services as a whole). One has to ask why all those at a high-risk of HIV are not using condoms already: even with standard PrEP adherence their risk factor is four times greater than a condom-user who has never taken the drug. 

Proponents of PrEP argue in its favour that its adoption rate may be greater than that of condoms, due to the fact that it does not inhibit pleasure, and is taken in advance of any other inhibition-lowering activities that might cause men to eschew condoms. However, most who trialled PrEP did not strictly adhere to it, resulting in the aforesaid reduction in efficacy from 0.92 to 0.44. Yet even basic adherence to the drug eased participants’ risk perception to the extent that they were actually more tempted to neglect condoms. In this scenario, PrEP is seen as an alternative to condoms — even if its usage is greater than condoms its efficacy will remain lower, and, more worryingly, condom usage will be discouraged. Thus, PrEP gives a false sense of security to those who are potentially most at risk of being infected, as shown by a 2010 study on PrEP and predicted condom use among high risk men who have sex with men, of whom over 35% reported that they would be likely to decrease condom use while using the drug. Further, the composition of the 35% defy basic intuition: they were more likely to be college educated, more likely to earn over $50,000 a year, and less likely to be substance dependent. They also scored higher on tests measuring both arousal barriers and risk perception motivations for condom use. Among this large minority of people then, taking PrEP may actuallyincrease the risk of acquiring HIV, as those who care the most for safety have their fears eased relatively the most by the promise of PrEP — a less effective prophylactic displaces a more effective (and vastly cheaper) one. Of course, this also greatly increases the risk of acquiring other STDs such as hepatitis B, hepatitis B, hepatitis D, chlamydia, gonorrhoea, and syphilis.

The elephant in the room where this debate is held, is rationing of health care.  We recoil from the admission that we cannot afford to provide everything possible for everyone for free. Yet finite resources can only fund finite provision, and the closer to being a gratis a service is, the more gratuitous its use will become, spiralling inevitably into inefficiency and bureaucratic excrescence. Can we prioritise a treatment which is so expensive, has relatively poor compliance rates, and which will probably serve to increase the incidence of a range of other serious conditions which will require further expensive management? Unfortunately, it seems that political motives and emotional appeal rank higher than do pragmatic QALY standards. However mechanical and inhuman these standards may seem, setting them intelligently —and adhering to them strictly — is essential to safeguarding the longterm viability of a free NHS.  

Southern Railway and renationalisation

The little contretemps over Southern Rail services this week is leading to the usual calls for the renationalisation of everything. We do not think that this is the solution, no, we don't. However, The Guardian has been asking its readers what they think and many of them think it is.

At which point we were very taken by this comment from one of those readers

To speak in a language that the "captains of industry" on here will understand. When deciding on how to run an operation you must look to best practice. And for the railways, this means best practice globally. It is quite clear that in Europe alone, it is France, Germany, Spain (for example) that run nationalised railways, and have excellent, fast, clean, modern trains that are also good value for money. We should look to emulate these countries when it comes to our national rail infrastructure. And not continue, what must be considered, one of the most absurd systems currently in use today.

Very well, let us do so. And which is more likely to do that? A profit seeking approximation to a free market or a nationalised industry run along political lines? We do have something of an answer to this. It's in this excellent piece from John Band:

When BR built the original Thameslink route in the 1980s, it shifted its trains to driver-only-operation, because train guards’ role in opening doors and dealing with breakdowns was now redundant. As weekend services grew across British Rail's network, driver contracts on some routes were shifted to a seven-day roster, so that they no longer relied on voluntary overtime. But on most of the network, including what is now Southern, this didn’t happen – and privatisation further reduced the incentive for difficult changes.  

This becomes a big problem when routes with different practices and contracts get merged into one. Thameslink drivers operate the doors; Southern mainline drivers don’t operate the doors. Southern mainline trains always carry guards, while Thameslink trains don’t. Given that these will soon be the same rolling stock, operating the same services, this situation is ridiculous and needs to be resolved.

Well, we disagree slightly that privatisation reduced the incentives - we seem to be seeing those incentives in play right now. However, this is the answer to that Guardian comment. That Southern is not even attempting to impose globally best practices. It's just trying to extend the current best practices within its own network to the whole of its own network.

Which isn't, we think, something that is going to be aided by renationalisation.

Let's just not count how effective government spending is, eh?

We have a report that a particular government program managed to spend a considerable amount of money and not achieve anything very much. According to The Guardian therefore we should not be asking to measure government spending by results.

Err, what?

According to Newsnight, the Ecorys report examined data from 56 local authorities and concluded there was “no discernible impact on the percentage of adults claiming out-of-work benefits either 12 or 18 months after starting on the programme” and “no obvious impact on the likelihood that adults were employed 12 or 18 months after starting on the programme”.

“Participation did not have any discernible impact on adult offending” seven to 18 months after the family was booked into the programme, it said.

Ecorys added: “Whilst it was more difficult to match the treatment and comparison groups when looking at child outcomes, the findings suggested that the programme also had no detectable impact on child offending.”

£1.3 billion of our money spent in order to show that David Cameron was a caring sort of chap. We think that there might be better uses of the cash squeezed out of the populace than that. However, The Guardian takes a different tack:

The troubled families scheme has failed – this is the folly of payment by results

No, that really is what they say:

It is time to call time on awarding public contracts which pay out for results, especially when the evidence for those results is so easy to manipulate .

Not really we feel. The time has come to insist upon only when paying out when results have been demonstrated.


The airport liquid ban is a damp squib

It is ten years to the day that strict liquid restrictions were imposed on travellers through UK airports. Even though there's very little evidence that these rules have stopped a single attack, they continue to have huge economic costs.

According to The Times:

"One in five security trays scanned by airports still contains drinks, aerosols, sun creams, perfumes or cosmetics which breach the regulations, according to research published today.
More than 140 million tonnes of bottled drinks were confiscated in the past 12 months as passengers went through scanners, Manchester Airports Group (MAG) revealed. It said that confusion over liquids remained the biggest single cause of delays at security queues during peak times."

As security expert Bruce Schneier points out:

"There are two classes of contraband at airport security checkpoints: the class that will get you in trouble if you try to bring it on an airplane, and the class that will cheerily be taken away from you if you try to bring it on an airplane."

The bottle ban falls into the later category. When travellers are stopped by security for having the wrong kind of bottle, they aren't then brought aside for questioning. That'd be too time consuming given the sheer number of accidental rule breakers. In fact, most security officers seem indifferent to what's actually in the bottle. The bottles are simply discarded and the passenger is waived on through. A wannabe attacker could take that risk over and over again.

Indeed, the very basis of the restrictions seem weak. Even if a would-be terrorist wasn't able to bring enough of an explosive on board as part of their liquid allowance, they could still buddy up with a couple others troublemakers and simply mix the explosive liquids together in a bigger bottle bought in duty free. 

You may point out that since bringing the rules in there have been no major terrorist attacks on airplanes coming out of UK/US airports. But Matt Ygleisas raises an interesting question. Why don't we see liquid explosive attacks on buses and trains where these strict rules aren't enforced? When a restriction is opposed on one activity, you would expect an increase on activities that are close substitutes. For example, if the Government banned e-cigs we'd expect to see sales of old fashioned tobacco cigarettes up. Yet, for terrorism in the UK we just don't see that substitution effect.

Regardless of their actual safety benefit, "Security Theatre" measures such as these may at least make passengers feel safer. But, ten years on, with millions of passengers ignoring the rules, long waits, and unnecessary waste, it's time to ask – is it worth it?

How excellent, the student loan system is working

Some people going to university to study certain subjects is an economically good thing for the country as a whole. All people going to university to study any subject is not. Therefore what we'd like is some system which determines who are the economically rational people and what are the economically rational subjects.

The answer to this is to charge the people who do the degrees for their degrees. And lend them the money in the meanwhile as the average 18 year old is not obviously a good credit risk.

Thus the student loan system and here is the proof that it is working:

And there is another chilling prospect to face. The number of British 18-year-olds going to university has dipped. Increasingly, savvy school leavers are beginning to realise they are being treated as gullible customers rather than potential Nobel prize-winners or even competent linguists or mathematicians. Whatever the incentives offered, do they really want to go to university any more?

According to a report this month by the Intergenerational Fund think tank, student debt payments wipe out the benefit of higher salaries for most graduates. Politicians who use more lucrative earnings to argue for higher fees should be “challenged for gross mis-selling”, the fund says, adding that apart from Oxbridge and medical graduates there is no guaranteed graduate “earnings premium”.

People taking account of the costs and benefits of a university degree as a result of the student loan system is not a fault nor a flaw in the system. It's the point of it.

Jeremy, you can't pay for anything out of a tax rate rise which doesn't increase revenue

It always comes as a shock to a certain type of person to find out that the Laffer Curve is actually true. No, we do not mean the caricature of it, that all tax cuts pay for themselves, but the actual contention itself. That there are tax rates above which revenue collected falls, not rises. What that rate is depends upon the economy which is being taxed, the tax being discussed and so on. That Laffer Curve peak for, say, cigarette taxation is going to be different than that for income taxes for example.

But that basic contention really is true. And thus the mistake being made by Jeremy Corbyn:

Jeremy Corbyn would fund pay rises for public sector workers partly through a 1% rise in corporation tax and bringing back the 50p top rate of tax, the party has said.

We don't approve of the basic idea here but we do understand it. This is merely politics - I'll take money off those nasty people over there to give to you, my dear voters. That is mere politics - the bribery of sufficient people to get elected.

However, we do still have that Laffer point. The best evidence we have is that the peak of the Curve, for the UK and for income taxes, is lower than that 50 pence or 50% rate. Yes, there's all sorts of exciting shouting matches over income shifting and so on as to what really happened when we had and then did not have said rate but our reading of it is that 50% is too high. 

We've also that Diamond and Saez paper in the US which said that, where there are allowances,  the peak rate is 54%. One such allowance which the UK has is the ability to become non-resident, an option not available in the US. Further, that 54% is "taxes upon income", not "income tax", meaning that we must add employers NI to our income tax rate to reach that 54%.

Both theory and empirical evidence seem to indicate that 50% in income tax is above our Curve peak. Meaning, of course, that raising the tax rate to that level will not increase revenue with which to bribe Corbynista voters.

At which point there's no reason to do it, is there?