The good intentions paving company

By now we should be well on our way to the "Big Society, Small Government" that David Cameron promised us. Now the Coalition is weakening on GDP growth, the idea is to promise us happiness, or at least well-being. Apparently, the government will nudge us towards more wholesome life styles rather than enforcing it through tax and regulation. In December 2010, the Nudge Team in the Cabinet Office published how their insights could be applied to health. The topics covered were: smoking, organ donation, teenage pregnancy, alcohol, diet and weight, diabetes, food hygiene, physical activity, and social care.

So far, so good.  Who could argue with improved well-being for us all and it being achieved through our own preferences and behaviour rather than government fiat?

Unfortunately, the programme has both a flaw and a problem. The flaw is the idea that GDP and happiness (i.e. satisfaction with life) are not as independent as the government would have us believe but closely correlated. Look no further than Greece to see the impact of a sharp deterioration on incomes on life satisfaction.  In January the IEA published an admirable analysis (“...and the Pursuit of Happiness: Wellbeing and the Role of Government”) showed clearly that GDP led life satisfaction.

It concluded “Happiness economics, which tries to extend a deficient hedonic morality to the arrangements of an open society, must be pronounced an unworkable project.”  Well that’s a bit high-flown but it boils down to the need for government to stick to its knitting, and that includes improving GDP, and desist from trying to manipulate our behaviour to match its preferences.

The problem is measurement.  A whole new science of indexing happiness is developing.  The OECD has a big hand in this as it wishes to measure well-being across countries.  Five years ago, an introductory paper on measuring subjective well-being noted four methods for starters: multi-item scales such as the Positive and Negative Affect Schedule and Satisfaction With Life. More recent important measurement approaches include the Experience Sampling Method, Ecological Momentary Assessment and the Day Reconstruction Method. There have been no shortage of proposals since then but the problem has less to do with confusion than dealing with time effects.

For example, an excessive imbiber of alcohol may report high satisfaction with life until his doctor diagnoses cirrhosis. The observer may know that no good will come of his drinking but if subjective well-being is what is measured, then drinking will increase his score on party nights even if the mornings after tell a different story.  It is not just a matter of short-term fluctuations but of factoring in the bad consequences from many years later.  To account for those, the government statisticians have to, in effect, present value the dire future and subtract it from today’s satisfaction.

In other words, we are no longer measuring subjective well-being as promised but what that subjective well-being would be if we were rational people with perfect knowledge of the government’s forecasts for us and if those forecasts were correct.  That is a lot of “ifs” to correct our illusions of our own well-being.

It does not take much manipulation of the figures to provide justification for whatever it is that the Department of Health, for example, wishes to do. It opens the door to more government interference in our lives and choices.  They know how to maximise our well-being even if, and especially when, we do not.

So what started out as a benign philosophy, Big Society, Small Government, perversely turns out, and not unusually, to have unintended consequences.  The issue is not the means, i.e. whether changing our behaviour is achieved by nudging (behavioural economics) or traditional tax and regulation.  The issue is freedom.  No one will quarrel with the need for government to tell us what the consequences of our behaviour are likely to be – assuming the science is valid – but we should be allowed to make our own choices. 

National happiness cannot be divorced from GDP; if our government wants us to be happy (and vote for them), they should concentrate on GDP..  Manipulating subjective well-being statistics to justify further government interference in our lives will not deceive the electorate.

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Selling the Rule of Law for £500m

On Radio 4’s Today Programme this morning, Exchequer Secretary to the Treasury David Gauke defended the introduction of retrospective tax law to make Barclays pay tax which it had avoided legally. “When we see something like this, behaviour which is unacceptable, we are willing to step in”, he said. There are always reasons to ditch rules which aren’t very convenient.  But such reasons are rarely good enough.  And certainly not when it is to scrape away the glue which keeps the law together: the Rule of Law.

Retrospective legislation – or Ex Post Facto law, as it is called in jargon – is unacceptable because it make coercive rules random at the behest of the rule maker.  In The Constitution of Liberty, Hayek describes how some coercive action by government is acceptable, provided it satisfies three conditions: generality, certainty, and equality.  Retrospective legislation fails on the certainty ground, and is therefore objectionable. Earlier, in The Road to Serfdom, he said:

“[The Rule of Law] means that the government in all its actions is bound by rules fixed and announced beforehand – rules which make it possible to foresee with fair certainty how the authority will use its coercive powers in given circumstances, and to plan one’s affairs on the basis of this knowledge.”

How is a company to assess costs and gains before it makes an investment if greedy government can turn around at any given moment and ask for more?  It is fundamentally unfair to hold a person to be in contravention of the law when the law did not exist when the alleged contravention occurred.

This is not the first time a greedy government has decided to outlaw behaviour after the facts. But there is even worse: leaving tax laws vague to give the taxman discretion to tax no matter what has been common practice in the UK for years.

Some have tried to legitimise the Treasury’s actions by pointing out that Barclays has signed a voluntary code of practice in which it promised not to use tax avoidance schemes. It was certainly silly of Barclays to do so, as tax avoidance is not illegal (tax evasion is); and by signing this code of practice it effectively harmed its shareholders. Its action may have been inspired by a fashionable public spirited sense of “corporate responsibility”.  Barclays wouldn’t be the first corporate player to decide that it’s quite a good little idea to collaborate with coercive greedy government. Never mind the consequences for the entrepreneurs who arrive later.

You cannot opt out of the Rule of Law. Barclays' silly signature changes nothing to that simple fact.  For the Treasury, £500 million of additional tax revenue is a sufficient reason to walk over legal certainty. Never mind the billions of pounds investment which will now walk out of the UK.

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Engineering works

When explaining what think tanks do, their members often quote the words of F A Hayek about "dealers in second-hand ideas."  It's a good phrase, because popularizing and explaining the key insights of thinkers such as Hayek, Popper and von Mises is very important. 

The Adam Smith Institute does some of this, but chooses a different role as its main activity.  We liken ourselves to engineers rather than pure scientists, and the engineering is of policy initiatives.  Thinkers such as Newton, Boyle and Kelvin make insights about falling and moving bodies, or about the behaviour of gases under pressure and temperature.  But if you sit waiting for a steam engine to appear, you might wait a very long time.  It takes a second kind of creativity to craft those breakthroughs of pure science into machines that function on their principles.

Understanding and propagating the principles of economics or public choice is one thing.  It is quite another to construct policies that apply those principles.  It is a creative process that uses insights into those principles in order to devise policies that will succeed in making the world a better place.  Introducing choice, enterprise and opportunity is not achieved by simply putting across the merits of those desirable goals, but by creating policy initiatives that can bring them about.

At the Adam Smith Institute we have always seen ourselves as engineers, creative in a different way to the pure scientists, and quite ready to roll up our sleeves and get the oil of machinery onto our hands.

Madsen's history of the ASI, Think Tank, is available to order now.

Wicked web

Oh what a tangled web we weave,
When first we practise to deceive

The tangled web that has become university funding in the UK is already throwing up early evidence of what a fraud the whole thing will prove to be.

In last week’s Times Higher Education, an article purports that students would be foolish to repay their loans early, even after the government’s scrapping of early-repayment penalties. It quotes Tim Leunig of CentreForum and a lecturer at the London School of Economics as saying graduates should think twice about paying off their debts early because most will never repay the full amount within 30 years, after which time arrears are written off.

He’s quoted as saying “Every penny of their early repayment is a gift to the government.” A gift to the government!!! That heavenly body showering us all with free goodies? What he really means is that failing to repay is a good kick in the ass to every hardworking taxpayer now stumping up the cash.

Putting yet another boot into the taxpayer is Liam Burns, president of the National Union of Students who’s quoted as saying “Ministers must come clean on student finance that those on low and middle income are not duped into chipping away at their outstanding debt.” Duped!!! Doesn’t he mean reneging on a promise?

So the government whips up a scheme for which it has no plans to fully collect unpaid debt, a teacher of our young advises against doing so and a student leader fans the flame of irresponsibility.

How morally bankrupt our body politic has become. 

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Economics is fun, part 10: Taxation

We've reached the halfway mark and, inevitably, the conversation turns to taxation. There will always be someone with a big stick breathing down your neck, creaming off as much of your stuff as he can. The only surprise is how many people want him to take more!

If you're enjoying these videos, you can buy the book they're based on here. The Kindle edition is remarkably affordable, and even if you don't have a Kindle, it's readable on Kindle apps for iPhones, iPads, Android phones and lots more. Now there's a smart way to while away the morning commute.

The Gender Pay Gap is Shrinking, Hurrah!

In fact, the gender pay gap has more than halved in just the past couple of years which is really pretty fast work for a societal change of that sort of type, isn't it? This wondrous information is contained in the latest release on the subject from ONS.

For full-time employees, hourly earnings excluding overtime were £11.91 for women (up 1.9 per cent) and £13.11 for men (up 0.8 per cent). This has resulted in the gender pay gap narrowing in 2011 to 9.1 per cent, down from 10.1 per cent in 2010 (see Figure 5).

My word, that is impressive, isn't it? For only a couple of years ago we were being told that the pay gap was 20% or more. No, really, Polly, The Guardian, the Fawcett Society, all were shouting this aloud and Something Must Be Done! In fact, it was worse than that. We were being told by the Equal Opportunities Commission that the female part time pay gap was as high as 37%!

Median hourly earnings for women working part-time are higher than those of part-time men. Men’s hourly earnings were £7.67, up 0.1 per cent since 2009, compared with women’s hourly earnings of £8.10, an increase of 1.3 per cent. The negative gender pay difference for part-time employees has therefore widened to minus 5.6 per cent from minus 4.3 per cent in 2010.

Goodness Gracious Me. Something needed to be done and Something Was Done! So, what was it that was actually done?

In 2009 ONS reviewed the way it presents gender pay statistics. The review concluded that there was no single measure which adequately dealt with the complex issue of the differences in men’s and women’s pay. ONS now highlights the following measures: • female full-time employees’ median pay compared with male full-time employees’ median pay • female part-time employees’ median pay compared with male part-time employees’ median pay • all female employees’ median pay compared with all male employees’ median pay ONS prefers to use hourly earnings, excluding overtime, and focuses on estimates of the median.

I was one of those people, here on this very blog, that revealed what was happening. Fawcett, Polly, the EOC and all, were using mean wages (means will always overstate gaps because of the rightwards skew of the earnings distribution), were comparing all female employees to all male (and not accounting for the greater number of female part time workers, part timers getting less per hour than full timers) and incredibly, were comparing part time female hourly wages to full time male to give their female part time pay gap.

So what actually happened in 2009 was, well, ONS call it a review. Actually what it was was a snarl at those so willfully misusing statistics and an admonition telling them not to be so stupid and not to do it again.

Which is why you haven't been reading turgid editorials about how appalling the gender pay gap is recently.

No, I do not claim any credit at all for this happening. I do take immense satisfaction in it having happened though.

Just to pile in on this choice thing with Dr. Clarke

Perhaps I shouldn't pile in on Eoin Clarke's little rant against choice but it's just so tempting that I'm afraid I cannot help myself. Sam's covered it well here but there is a tad more we can add.

I do slightly sympathise (the emphasis there is on slightly) with the Rube from Belfast being astounded that they did things different in foreign. Even when past my rube years I've been to enough foreigns to be astounded at the way some things are done. I have, for example, faced down Soviet bureaucracy in my time which is an experience to astound anyone.

But past that (and I again emphasise the slightly) I end up in gasping slack jawed amazement. For here is a man quite seriously proposing that, because he got confused about coffee three minutes after arriving in a new country then choice is a bad thing. Note that he didn't dislike choice enough not to try a new country, nor move on to a third afterwards.

But think what this no choice mantra actually leads to. Logically, at least, there should only be one book. One film, one TV station at least if not only one TV programme. Even thought these are consumables we should certainly only be allowed to have only one of each at any one time. Umm, actually, why should we have a choice between a movie or a show? And isn't that decision about the musical, the comedy or the tragedy all too complicated?

And if you're to dim, confused or Rube enough to not be able to work out what sort of coffee you want then how can you be trusted with the vote? After all, one government that just gets on and provides everything would be just fine wouldn't it? Like one NHS that just does stuff. Who needs any input from the populace into what that government should do?

It is true that what the NHS does is complicated: so is what government does.

We have actually had a number of experiments around the world at doing just that and they've not really worked out all that well have they? That the NHS is such a Wonder of the World that no one has tried to copy its no choice agenda might also be a revealing piece of evidence.

But here's my real mindboggle. Dr. Clarke is a historian of feminism in Irish Republicanism. He studies those women who fought for choice within their own society, that women actually be allowed to make choices. Inside a movement whose entire existence was predicated on the desire to have a choice in forms and source of governance. This is his professional career. His conclusion is that choice is undesirable.

Ho hum.

Review: Knowledge and Coordination – A Liberal Interpretation

There’s a contradiction at the heart of much modern classical liberalism. Since Adam Smith, successive generations of classical liberals (particularly in economics) have tried to build a systematic science of man to demonstrate the value of liberty. In contrast to Smith’s vision of economics and moral philosophy as a messy, ad hoc pursuit, modern classical liberals and libertarians have generally proposed a vision of economics and the social sciences as foundational sciences. In different ways, this is apparent in both the deductive praxeology of Ludwig von Mises and Murray Rothbard, and the neoclassical economics of George Stigler, Milton Friedman and most modern classical liberal economists.

Daniel B. Klein’s new book, Knowledge and Coordination: A Liberal Interpretation (you can read parts of it here), tells us to throw out this worldview and embrace a concept of spontaneous order rooted in the work of Adam Smith and FA Hayek. Klein is a professor of economics at George Mason University who, like Smith, has a background in philosophy. In Knowledge and Coordination, he argues that we should try to understand society not by building a series of upward steps derived from axiomatic principles, but by viewing society as a complex web of spontaneous interactions.

Knowledge and Coordination is divided into several parts, which initially seem disparate, including a detailed discussion of entrepreneurship, surprises, and coordination, detailed discussions of the political economy of urban transit and safety regulations, and a philosophical discussion of the value of the “impartial spectator” perspective in moral philosophy and economic analysis.

Klein’s discussion coordination is, by itself, a valuable contribution to the study of spontaneous order. He delineates mutual coordination (conscious “mutually intermeshing behaviour” between two or more parties) and concatenate coordination, a broader “invisible hand”-like coordination that that comes from system-wide harmonious coordination.

Think of Leonard E. Read’s story of the complexities of making a pencil: most of the people are cooperating mutually with their buyers and sellers, but on a whole they are creating a complex mesh of coordination which ultimately leads to the creation of the pencil. The result of human action, but not (necessarily) of human design – this concatenate coordination is usually what classical liberals mean when they talk about the coordinative benefits of a free market system.

One of Klein’s most interesting points is that this concatenate coordination only makes sense from the point of view of an impartial spectator. In this he draws on Adam Smith’s Theory of Moral Sentiments, in which Smith argued that moral philosophy was best interpreted through the eyes of a spectoral viewer – as Klein says, not your conscience, but your “conscience’s conscience’s conscience’s ... conscience”.

But Klein takes Smith’s allegory further. The whole realm of human action (Klein focuses on economics), he says, is best understood by taking this allegorical spectator’s view, to appreciate the aesthetics and efficiencies of system-wide coordinations that would otherwise be ignored from a rigidly individualistic point of view.

On discovery and knowledge, Klein makes a convincing case against “flattening” knowledge into “information” in order to fit it into the confines of economic modelling. He uses an example of a man recently put out of work who feels like a cigarette but can’t find a tobacconist. Sensing an opportunity, he sets up his own tobacconist and rises to own a successful chain of shops. This surprise discovery is central to entrepreneurship and innovation, but is almost completely discounted by economic modelling. Klein argues that “freedom causes prosperity principally because freedom generates discovery”, but this point depends on Klein’s “thick” view of knowledge and discovery.

Three chapters on different areas of public policy – urban transport, safety regulations and technologically-enhanced central planning – apply his web perspective with success. Though he discusses these areas in considerable detail, he does not attempt to recommend specific recommendations. His aim is to show that the web of coordination is no less complex when we drill down into specific areas than when we look at society and the economy as a whole. The Smith-Hayek perspective allows us to grasp around certain areas of human interaction, only really appreciating the limits of our ability to improve them. These parts are an analytical complement to historical case against government schemes to improve the human condition like James C. Scott's Seeing Like a State and Jane Jacobs's The Death and Life of Great American Cities.

Klein hopes to develop a Smith-Hayek argument for liberty, favouring a “by and large” liberty maxim over an absolute liberty axiom. The liberty maxim is much more robust than the absolutist axiom in providing a defence of liberty. Instead of having to prove itself in every single make-or-break hypothetical example, the liberty maxim is more modest and realistic, and embeds the case for liberty in the Smith-Hayek view of spontaneous orders.

This mirrors Smith’s moral philosophy. When presented with the choice between the utilitarian maximization of happiness or the categorical imperative of natural rights, Smith and Klein shrug. Don’t try to build morality up from first principles, they say, but treat it as an “aesthetics of human agency”. Whatever works, works. Don’t try to reduce morality to a rule, model or mathematical formula.

Klein’s vision is radically humble. Throw out your models and accept life’s complicated messiness. Early on, Klein says his aim is to provide a new “by and large” presumption of liberty rooted in the Scottish Enlightenment. He does far more than this. Knowledge and Coordination is a profound, brilliant book that returns Adam Smith to the centre of the classical liberal worldview. It should provoke a paradigm shift among classical liberals and libertarians. Embrace the illegible world we live in. The virtues of liberty are clearest when we take the view of the impartial spectator, and most robust when we realize just how disjointed and spontaneous the orders that we exist in really are.

Dan Klein will be speaking on his paper Mere Libertarianism: Blending Hayek and Rothbard at the Adam Smith Institute on the 20th of March.

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Debt reduction and economic growth

Here’s a letter I wrote to the Evening Standard last week. I’m not sure whether they published it or not.

Too many people believe we have a choice between debt reduction and economic growth – that we can have one, but not the other. Nothing could be further from the truth. In fact, debt is the greatest threat to our economic stability and debt reduction is the surest route back to economic health. Recessions are painful, but they also play a vital role in the business cycle: as the excesses of the boom years are unwound, as bad investments are liquidated and debts paid down, solid foundations are laid for real, sustainable growth in the future. 

This has important implications. Firstly, it demands that George Osborne not only sticks with his deficit reduction plan, but actually goes further and faster. There is scope to do this. Remember, Labour raised spending by 60 percent while they were in office. The coalition government has so far reversed only the tiniest fraction of  this. Secondly, the government must stop artificially stimulating borrowing and let the necessary private- and financial-sector deleveraging take place. History shows that growth returns once this process is underway, and not before. The Swedish experience of the 1990s is a good example of this in practice. 

The Eurozone crisis paints a horrifying picture of what happens when debt spirals out of control, and Moody’s recent negative outlook warning shows that Britain is not immmune from the problems affecting the Continent. If we fail to reduce debt, the best we can hope for is Japanese-style stagnation. The worst case scenario – financial chaos and monetary collapse – is altogether less pleasant.

Perhaps I should have included a historical example of debt reduction going hand in hand with a return to economic health. One such occasion is the ‘forgotten depression’ of 1920, which Tom Woods writes about here:

The economic situation in 1920 was grim. By that year unemployment had jumped from 4 percent to nearly 12 percent, and GNP declined 17 percent… Instead of "fiscal stimulus," Harding cut the government's budget nearly in half between 1920 and 1922. The rest of Harding's approach was equally laissez-faire. Tax rates were slashed for all income groups. The national debt was reduced by one-third… By the late summer of 1921, signs of recovery were already visible. The following year, unemployment was back down to 6.7 percent and it was only 2.4 percent by 1923.

An alternative approach to unemployment

Last week’s joblessness figures were hardly encouraging. The Chartered Institute of Personnel and Development predicts a gloomy forecast for employment prospects, forecasting unemployment to reach 2.85 million by the end of 2012. Their Labour Market Outlook makes for very miserable reading for those seeking jobs. Similarly, research from the TUC suggests that ‘unemployment’ may be at around 6 million if those in temporary work or underemployed are taken into account. The TUC has applied the US U1-U6 system of measuring unemployment.

Of course, we should take the TUC’s research with a good pinch of salt. The TUC has taken the broadest possible measure of unemployment, naturally, as it wishes to criticise government policy. The TUC does not give a great deal of detail about the source data it used – it simply states that they are derived from the ONS, so it is not easy to critique its methodology, aside from the general criticisms that must be attached to the US system. These figures do not allow for revealed preference; individuals may state that they are willing to work full time but actually may not to do so if a full-time job were available. If nothing else, the TUC’s presentation is misleading as the US figures expressly contain six different types of ‘unemployment’, so to pick one (U6) and present it as definitive is disingenuous in itself.  

These caveats notwithstanding, unemployment is clearly high and rising by most measures and there is a considerable level of underemployment within the economy. The TUC’s answer is, of course, government ‘stimulus’ and job creation schemes. Regardless of the fiscal impact of further government stimulus, it is unlikely that it will be successful. We have a huge fiscal stimulus already in place and pre-existing job schemes have repeatedly failed – the underperformance of the government’s Work Programme is merely the latest in a long line.

What comes across far more strikingly from these figures is the very high level of structural unemployment in the UK, prior to 2009, something that the TUC entirely fails to mention because it does not fit its picture of ‘demand deficiency’. In April 2005, firmly within the boom years, official unemployment (U3) stood at 1,437,000 (roughly 4.5% of the active labour force) and the broad figure (U6) at 4,184,000 (13.5%). Why then, in the midst of an unprecedented boom and with an acknowledged shortage of skilled labour, was there so many unemployed and discouraged workers in the economy and did the markets fail to clear?

Unemployment is a complex phenomenon but it is clear that a great deal of the UK’s unemployment is unrelated to demand and is, in fact, a result of structural factors. The solution to this sort of unemployment is supply-side reform, of a far more radical sort than the present government is proposing: eliminating – or at least ‘regionalising’ - the minimum wage, reducing employment regulation, lowering and flattening taxes on income and employment and eliminating high marginal tax rates caused by the tax and benefits system. It is also clear that the state education system is utterly failing to equip many young people with the skills that the job market requires. Obviously, many of these reforms are long-term and would require much effort on behalf of the government in the face of entrenched interest-group opposition. However, the present government is not only missing much low-hanging fruit or taking little action but is actually creating further supply-side problems. 

In terms of the discouraged and temporarily employed, the TUC fails to recognise that the prevalence of this is the result of government-created barriers to permanent employment. Temporary employment is not, in most cases, advantageous for employers. The means to re-engage workers and encourage permanent and full-time employment is to de-regulate and eliminate the disincentives for employers to hire workers, not to apply the same restrictions to temporary employment which will merely serve to drive such employees out of work altogether.

Generally speaking, the Coalition government has tended towards the TUC’s approach – stimulus and work programmes – far more than it has to supply-side reform. This is profoundly disappointing, especially given the clear evidence that much of the UK’s unemployment is structural and bears little relation to the cyclical environment.

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