Less regulation means shorter recessions

In recent years, many economists on the left of the political spectrum, such as Joseph Stiglitz and Paul Krugman have argued that laissez-faire policies have made banking crises (like the Global Financial Crisis) more likely.

But, even if this were true is it a mark against them? It depends. As Scott Sumner points out not every banking crisis becomes a recession. Indeed, one study by Dwyer et al, found that one in four banking crises didn't lead to a fall in GDP per capita in the following two years. And countries that experience occasional financial crises typically grow a lot faster than countries with more stable financial conditions.

What matters then, is not the likelihood of a banking crisis, but whether an economy is more or less likely to make a quick recovery.

According to a working paper by Christian Bjørnskov, economies with greater levels of economic freedom (in particular greater levels of regulatory freedom), recover faster and more likely to stop an economic crises from becoming a recession. Looking at 212 crises across 175 different countries, he found that countries with high levels of regulatory efficiency (as measured by their score on The Heritage Foundation's Index of Economic Freedom) tended to have shallower and shorter recessions.

Why might this be? Bjørnskov gives a few possible reasons.

"As a crisis hits an economy, a substantial share of resources become unemployed, which creates profit opportunities for entrepreneurs to the extent that these resources become cheaper. Yet, whether or not this happens and at which speed existing firms and new entrants can reallocate resources depends on the regulatory framework.
Licensing requirements and similar business regulations constitute entry barriers that prevent entrepreneurs from seizing legal opportunities and thereby limiting the economic and social losses during crises. Unstable monetary policies and inflationary interventions prevent the formation of precise price expectations, thereby increasing uncertainty, which would also hold back new investments (Friedman, 1962).
Finally, labour market regulations can make it both more expensive and risky to hire new employees, providing a third channel through which deficient or inefficient regulations significantly increase the transaction costs of reallocation. Consistent with the evidence, this does not prevent a crisis from occurring, but limits its extent as more firms in a flexible economy can react faster and in a more economical way to the challenges and opportunities created by the crisis."

Recessions that forces business to cutback, lay off workers and even shut down may be painful, but they also allow for the creative destruction and dynamism that benefit us all. But it's only when regulatory barriers are low, inflation is predictable, and labour markets are flexible, that entrepreneurs can take advantage of those opportunities quickly enough to avoid a prolonged slump.

Shut down the war on drugs, not Fabric

After the tragic drug related deaths of two men recently, the nightclub Fabric has been forced to temporarily close its doors. Despite the club’s full cooperation with authorities- and its concerted efforts to clampdown on the sale of drugs on its premises- it might be forced to close down permanently.

Such a move would be devastating for London’s nightlife and music scene. Fabric is internationally renowned and attracts visitors from all over the world. It has also helped to launch the careers of world famous musicians and DJ’s. Closing down Fabric would also hurt the economy- it employs 250 people and many people travel to London in order to visit Fabric.

Not only would the forced closure of Fabric destroy the rich cultural tapestry of London and hurt the economy, it would also be incredibly unfair. Fabric is being punished as a result of the free choices of individuals. The club did not sell them the drugs or encourage them to take them- in fact they have tried repeatedly to clamp down on drug use and their staff offer support and advice to those who may have taken them- and yet Fabric is being punished.

The plight of Fabric serves to highlight the absurdity of the UK’s drug laws. People should be treated as free agents and be allowed to put whatever they please into their body without the State harassing them. Drug laws are an affront to individual liberty.

Drug laws are also ineffective and there is a plethora of research that strongly suggests decriminalisation has no real impact on levels of drug use. Furthermore, other studies reveal that decriminalisation has a positive impact, as it reduces the burden on criminal justice systems. Therefore, if decriminalisation would not result in more people consuming harmful substances, and if it would reduce the burden on the justice system, perhaps it is time to seriously consider decriminalisation.

In fact the prohibition of drugs exacerbates the problem as it results in the development of even more dangerous drugs. Crack cocaine and crystal meth, two of the most terribly destructive drugs, came into being as a result of the US government’s attempts to eradicate the supply of less dangerous drugs. Such a clampdown on cannabis led people to legal highs; any further legislation will force the market underground and will hand even more power to criminals, meaning more harmful substances being created and consumed.

Not only are drug laws in the UK and around the world ineffective and cumbersome, they are also inherently unfair and increase inequality. As a result of drug laws, prison populations in the UK and the US have a disproportionately high number of people who are black, young or poor – quite often all three.

Furthermore, drug prohibition hands power and money over to violent and odious criminals. This is particularly true with cannabis, which holds the largest share of the drug market. An example of this is provided by the impact of cannabis legalisation in some American states. As people can now buy cannabis legally, it has reduced the prices that drug dealers are charging. Decriminalisation has had a massive impact on the power and profits of Mexican drug cartels.

The government needs to seriously consider decriminalising drugs. If it did this, it would radically reduce the power of some of the most vile and detestable people around the world, decrease the burden on the already overstretched criminal justice system, and dramatically reduce the number of ethnic minorities and other disadvantaged people in prison.

Mary Berry doesn't therefore you must be banned from doing so

It's said that people become more conservative as they grow older - that liberal mugged by reality thing. It is perhaps possible to become too illiberal as this process happens:

Sugary drinks should be banned, Mary Berry has said, as she revealed that she refuses to give her grandchildren anything other than water to drink.
“I honestly think there shouldn’t be sugared drinks. All my grandchildren drink water all through the day. I’ve just had them to stay and at breakfast they have water. They don’t even know what sugary drinks are.”

How Mary Berry grandmothers her brood is of course up to Mary Berry. That's rather the point of being liberal. It's also fine that Ms. Berry urge others to do as she does. That's also that liberal free speech thing.

However, Ms. Berry does not boogie the night away therefore no one else should? Not that we know either way but Ms. Berry does not attempt legovers with interesting people she is not married to? Therefore the law should be changed so that none may? May Berry has only soup for lunch, as she tells us, therefore soup should be the only lunch for all Britons?

To examine the logic is to see how ludicrous it is if we are to maintain any pretence at all of being a free and liberal society. Our aim, in so far as there is an aim to governance at all, is to maximise the amount of what people desire to do, as defined by those people themselves. If that includes sugary drinks, bopping 'till they drop or the fruits of the sexual revolution well, that's just up to them.

It may be that Ms. Berry is only urging that parents and grandparents ban sugary drinks for their own brood(s). But there are very definitely others out there who would ban them for all.

There's a remarkably large number of things that distinguished ladies of a certain age do not do but which many others do and enjoy doing. Our actual ruling principle is and should be chacun a son gout.


We can't see how this works Young Owen, sorry, just can't see it

Owen Jones tells us several things about the current rail system:

If you live in London and urgently needed to make it to Leeds today, you would have to part with at least £98.70. A British Airways flight to Paris booked today, on the other hand, will leave you £62 worse off. The cheapest train to Edinburgh today costs £128.20. There are cheaper flights available to Madrid (£88), Berlin (£90) and Rome (£112). The proportion of British commuters’ pay packets spent on train tickets is up to issix times higher than their European equivalents.
As a 2013 report found, the state shells out billions more on public subsidies for railways than it did in the days of British Rail. And after inflation, overall public spending on the railways was an astonishing six times higher in 2013 than after privatisation in 1996.

Train tickets cost more in the UK than in many other countries. Quite true. That's because those travelling pay rather more of the cost of their travel than do people in other countries. That is, the general taxpayer pays rather less of the bill, subsidising the travel of other people. Which, we are really pretty sure, is the right way to be doing it. Those who get the service should be the people paying for it.

However, we also get told this:

The case for publicly run rail is popular, and for good reason. It would cost nothing to bring rail franchises into public ownership as they expire, and they could prove to be cash cows for the Treasury.

It's possible that the railways are, will be or could be profitable whoever owns them. It's possible that they are, will be or could be in need of large subsidy as they are not profitable, whoever owns them. But this is the bit we cannot understand. How can we describe something which requires large subsidy as being a cash cow? Doesn't compute, does it?

The difference between Mr. Chakrabortty and us on foreign aid

Aditya Chakrabortty tells us that it's very important indeed that the UK continue to shift 0.7% of GDP overseas as foreign aid:

No, if you want to see how far to the right our new prime minister will go, watch one area that most papers barely cover. Watch international development.

By development, I mean emergency relief for Syrians bombed out of their homes, healthcare for new mothers and their kids in Sierra Leone and school lessons for girls in Pakistan. Who could be against any of that? The answer is: no one in mainstream politics. It may have been Labour that pledged a target for government aid spending, but it was the Tory-led coalition that made that promise reality so that, of every £100 Britain earns, 70 pence goes to poor countries. That, David Cameron claimed on his last day at No 10, was one of his proudest achievements.

We agree entirely that aiding the poor in becoming rich is a moral imperative. We also agree that there's much that we can do to aid in this process. However, we are with Peter Bauer here, in that foreign aid is all too often taking money from poor people in rich countries to give it to rich people in poor countries.

We exclude from this disaster aid - although even there we insist that sending food which arrives well after the next harvest is not the way to deal with famine. Instead, send money to give to people to buy food. As Amartya Sen has pointed out, modern famines are not about a dearth of food, they are about an absence of effective demand. Let us solve the actual problem in front of us.

But aid as development aid? Again, let us solve the actual problem in front of us. Which is that poor people are poor because they produce little of value. Not just little of value to us but little of value to themselves or anyone else. The solution to that is to aid them in producing things of value. Economic development that is - or, as Madsen of these parts puts it, buy things made by poor people in poor countries. 

With Brexit now to happen there is a golden opportunity for us to aid in this:

Take the example of coffee. In 2014 Africa —the home of coffee— earned nearly $2.4 billion from the crop. Germany, a leading processor, earned about $3.8 billion from coffee re-exports.

The concern is not that Germany benefits from processing coffee. It is that Africa is punished by EU tariff barriers for doing so. Non-decaffeinated green coffee is exempt from the charges. However, a 7.5 per cent charge is imposed on roasted coffee. As a result, the bulk of Africa’s export to the EU is unroasted green coffee.

The charge on cocoa is even more debilitating. It is reported that the “EU charges (a tariff) of 30 per cent for processed cocoa products like chocolate bars or cocoa powder, and 60 per cent for some other refined products containing cocoa.”

The impact of such charges goes well beyond lost export opportunities. They suppress technological innovation and industrial development among African countries. The practice denies the continent the ability to acquire, adopt and diffuse technologies used in food processing. It explains to some extent the low level of investment in Africa’s food processing enterprises.

If we wish to aid developing countries in developing we should buy more of what they produce. And enable them to add more value to it to boot. The best thing we British can do is simply throw open our borders, entirely tariff free, to anything and everything made by poor people in poor countries.

There are those who insist that unilateral free trade causes jobs losses at home. They are wrong of course, that is nonsense, cheaper imports make us richer. But imagine they are right - what better use of the aid budget than enabling development overseas and compensating those who lose from it? 

This free market globalisation thing has led, in recent decades - and as we have pointed out many a time - to the greatest reduction in absolute poverty in the history of our species. We should be, if we do want to aid development, reinforcing what works. Which means opening up, tariff free, to those products of the poor. Once and only if the aid wallahs agree to that will we even start to discuss that aid target as something that might remain. Because only if they agree to that will we know they are being serious about wishing to boost development.

There is absolutely nothing new in the IFS gender pay gap paper

We all know that, on average if you count all men and women, men take home more money in pay than women. We also know that, on average, people who work sixty hours a week take home more than those who work thirty hours a week. And those in banking and law take home more than those in psychology and education.

The Institute for Fiscal Studies has a paper out today (pdf), which has been widely feted across the press, despite the fact that it simply repackages these facts with barely any extra analysis or information, though they do have some cool charts and graphs. I suspect they didn't tell the media that their data is no better than—and in my view a good deal inferior to the official Office for National Statistics numbers.

In their paper they show that there is indeed a raw gender pay gap, which is reduced substantially by various controls (like hours and having kids). They cut this up and display the data in some pretty cool ways below. But they don't mention that some pretty important facts have been left out of their narrative.

For example: do we think that all young men and women without children choose, on average, the same A-levels choices, degrees, and career paths? I'll answer the question: they don't. In the USA, 95% of the gender pay gap among new graduates is down to subject major choice—some degrees are more lucrative than others.

This, in turn, seems to be because men are more ruthlessly materialistic in major and career choice. And it reflects values men and women express in long, careful studies. Gender difference (whether socially constructed or genetically inborn, or most likely, a bit of both) predicts the world we see much better than discrimination.

When women do go into high earning, competitive fields, they do very well. In fact, one study found that women were more aggressively promoted, and earned more than men, so long as they didn't exit the workforce.

In fact, Harvard economist Claudia Goldin found (pdf) that the gender pay gap only existed in industries where there are increasing returns to hours: where 80 hours a week is worth more than double 40 hours a week, and where flexible hours are impossible for technical reasons. In these fields women were less productive because they chose to have a work-life balance that men avoided (and not just because of kids). Since they were less productive, firms paid them less.

Is this a bad thing. Well, it depends whether you think money and career success are the only important ends in life, and it depends whether you think that men and women have to have (on average) the same paths in life to have equally good paths in life. I don't think it's worse to work thirty flexible hours a week than it is to work six ten-hour days, and I think it would be dystopian to try and make everyone's careers similar.

What we want is equal work for equal pay, and according to our best analyses of the gender pay gap data, that's what we have. Today's IFS paper adds nothing to our understanding.

Children are the cause of the gender pay gap

Yet another piece of research telling us what we've been telling us all for some time now. There is, in reality, no such thing as the gender pay gap. There's a motherhood pay gap and, obviously, children are the cause of it:

Mothers who return to work end up earning a third less than men as the birth of a child cuts their chances of getting promotions and pay rises, a study has found.

This is mainly as a result of mothers tending to work fewer hours than colleagues who are not parents, according to the Institute for Fiscal Studies (IFS).

“Men’s wages tend to continue growing rapidly at this point in the life cycle (particularly for the highly-educated), while women’s wages plateau,” said the IFS.

From other research we find that each child reduces a mother's earnings, on average of course, by 9%. At the same time fathers earn around (but not dependent upon the number of children), some 8% more than non-fathers. That's all we need to explain the pay gap.

Another way to put this is that there is discrimination going on, indeed there is, but it's by parents themselves over how they wish to live their lives. And being the good little liberals we are we think that's just fine - the point and purpose of the whole system is that people get to, as much as is actually possible, live their lives as they wish to.

It may well be that you think matters should not be this way. We don't think it surprising, in a mammalian and thus viviparous species, that it is. But if you wish to change it from the way it is then you're going to have to change human behaviour. Given that the gap is produced by mothers, on average of course, desiring to be primary care givers to their brood, fathers to be primary providers, that's the behaviour which will have to be changed. Good luck with that.

Finally, we would note that the sort of thing that would need to change would be time off at the time of birth, insistence of flexible hours by fathers and so on. A different self-sorting that is of new and established parents. We made this point here, right here, over a decade ago and shared parental leave was the legislative result. Yes, that was us, in fact it was this writer.

Pay audits, equal pay for equal work, the usual shouts, just won't cut it. As long as there's a gender imbalance in primary carers, and such primary carers value that role more than climbing the greasy pole, then the gap will persist. At which point, well, whattchagonnadoaboutit?


Will Boondoggling Help UK Exports?

Theresa May, like George Osborne, recognised the importance of exports for Britain but her solution is similarly simplistic. George Osborne doubled the UK Trade and Investment budget and Theresa May has grossed the quango up to become a Department of State under Dr Liam Fox with three ministers and the usual baggage train of advisers.

UKTI has been a muddle since it was created twenty years ago as an unholy marriage of FCO trade, and the Business Department’s overseas, interests. The worst of both resulted in a non-stop rotation of management with each giving only the illusion of progress.

The last daft idea was to disperse the central UKTI staff across Whitehall. According to Francis Maude, the then Chairman, this would infuse the spirit of exporting across all government and thence throughout the country.

The new department’s boondoggle at the Rio Olympic Games, “The British House”, provided typically mis-targeted promotion: “guests to the House can expect to hear from high profile VIPs, Ministers, and inspiring industry-leaders from the UK.”

Meanwhile the House of Commons Business Select Committee set up an enquiry into UKTI in 2015. Evidence was taken and their report, due in May, has yet to appear and may never do so. On the one hand, Government considers exports of overwhelming importance and, on the other, Parliament is preoccupied by more newsworthy events such as Sir Philip Green and BHS.

The April-appointed Lord Price, previously MD of Waitrose, and Catherine Raines, are probably the best ever UKTI chairman and CEO. Now they are swamped with politicians who know nothing of exporting, one must fear the worst.

The Department for International Trade needs focus. One reason UKTI has always failed is its excessive number of initiatives: government should focus only on what the private sector cannot do for itself.

The British Chambers of Commerce are building international networks for small businesses; they should be left to get on with it with support from FCO overseas posts where required. Large companies have their own UK-based specialists. In other words, UK based UKTI staff, apart from the very few policy makers in Whitehall and those setting up major overseas missions, should be disbanded. The focus should be on networking through overseas posts.

Unfortunately, as the National Audit Office have routinely reported, the FCO is temperamentally unsuited to deal with anything as vulgar as trade. Leaving overseas posts with the FCO whilst taking international trade away (it had a half share in UKTI) will not help.

The only other area for government involvement is with the big banks who claim to support small exporters but, in practice, demand their umbrellas back whenever it rains. Transferring UK Export Finance from the Business, Innovation and Skills Department to the new Department for International Trade is a good idea but monitoring the big banks needs to go much further if the banks are to practice the support for exports that they preach.

In short, international trade should not be built up into yet another great Whitehall bureaucracy, with politicians scrabbling for power, but be shrunk to focus on what only government can do and be accountable for that.

The problem with technocracy

Once again we see the basic problem with technocracy:

Adults will be told it is fine to drink in moderation in new guidelines on alcohol intake unveiled by the govern­ment — in a slapdown of Britain’s top doctor.

The rules, to be announced soon, will set the recommended weekly limit for both men and women at 14 units, a reduction of seven for men, and explain that every drink comes with a small health risk.

The dangers of alcohol, like the dangers of rather a lot of things in this life, come on a curve. No booze at all leads to shorter lifespans than some, too much to shorter again. Where those curves are is of course an empirical matter but the too much, leading to the same dangers as none, is well out beyond 14 units a week for men. Up more at 30 to 40 units in fact.

That this is true of much of life is obvious - no food is not known to be good for us, 5,000 calories a day plus a sedentary lifestyle similarly not all that healthy. A diet of pure sugar won't keep you going all that long but an insistence on "no refined sugar" is to make the opposite mistake. And on the larger scale of course a tax rate of zero percent raises no money from that particular tax while there really is a rate which is "too high" in that raising it further will produce ever less revenue.

It's superficially attractive that we have experts who decide how these curves work and then tell the rest of us. Certainly we think that pointing out that the peak of the Laffer Curve for UK income tax is somewhere around 40% or so, less than 50% or so, is an empirical result which we think experts should mention.

And yet there's a problem with such technocracy. It's akin to the trade protection and tariffs problem. The people who will end up as the technocrats on any particular subject are going to be those with a whole hive of bees in their bonnet about that particular subject. We end up being ruled by the Single Issue Fanatics, as Bernard Levin used to put it. 

It's a standard analysis of the problem with trade tariffs. Those who gain from the protection they provide are a concentrated interest- those few who produce whatever the tariff is placed upon. Those losers are the dispersed interest of everyone else. We don't care very much, and therefore make very little noise about, tuppence on every toothbrush. Toothbrush manufacturers are very interested indeed, and will be most vocal, about 2 p on every brush they sell. And will thus be insistent about the vital interest of protecting British teeth from the horrors of Chinese competition.

So it is with our technocrats. Those who take a sufficient interest in how much other people drink are going to be those who are very interested in being able to control how much other people drink. The Temperance Lobby in short. Those who wish to control how much people smoke are going to be those against smoking itself. Those who work to regulate e-ciggies will be those who really don't think they should exist at all. "Proper" salt levels will be determined by those with a bugbear about salt for whatever reason.

It is that concentrated and dispersed interest again. As soon as there is some small part of government which determines such details that small part will be colonised by the fanatics.

Which is the basic problem with technocracy. It doesn't end up with those who know what they're doing running matters, it ends up with the fanatics as they're the only people who care enough to regulate the rest of us. And if we're honest about it rule by fanatics doesn't have quite the same ring to it as rule by experts.

All of which is rather why we are fanatics ourselves. Fanatics for there being fewer rules and rather more of that dispersed interest making itself known by what people get on and do themselves rather than the imposition of absurdities by those with the power to do so.