The problem with over arching regulation is that it concentrates error

Yet another example of why market competition beats bureaucratic regulation. For if we have such competition then some certain amount of the people doing it are going to be wrong. Wrong in what they're doing it, how they're doing it, what they think people want to have done - the very fact that many people are doing it in many different manners is simple enough proof of that.

True, there's always the possibility that different people want different things done in different ways but we mean something more basic here, before we get to that stage. And thus we could indeed ponder the idea that if all the clever people just told us what to do then we'd avoid the waste of that competition and that wrongness.

Except it doesn't actually work that way:

Sir James Dyson has won a shock victory in the European courts over Brussels rules which the company says unfairly penalised its vacuum cleaners.

An appeal in the European Court of Justice said a previous ruling from a lower court against Dyson had “distorted the facts” and “erred in law”.

The EU decided that vacuum cleaners should be tested for their energy efficiency. They then went on to determine how they should be so tested.

The billionaire entrepreneur argued that the tests are only relevant to vacuums with their dust bags empty and do not cover them when they are full, as they would typically be in normal use. A full vacuum would typically use more energy.

Dyson’s vacuums use a “cyclonic” design without a bag to collect dust and the company argued that the tests used by the EU unfairly disadvantaged its products.

Two years ago the company argued in the European general court that there was a way of testing conventional vacuums when the bag was full, so a comparison could be drawn between the two designs.

The European Court of Justice today upheld parts of Dyson’s appeal, backing the company’s claims that tests are available to measure a vacuum’s performance when full.

It also backed the British company’s by saying tests should “measure the performance of vacuum cleaners in conditions as close as possible to actual conditions of use”.

That there is error in a system is one of those unfortunate truths about any system containing human beings. What we want therefore is a system which sorts through the errors as fast as possible and eliminates them.

Which is really what a market does for us, it's an experimentation machine. This works, that doesn't, this does but no one wants it, nope, they want this but it's currently impossible and so on. Bureaucratic regulation simply concentrates the error. The entire continent of Europe has had the energy performance of vacuum cleaners wrongly reported to it for years now precisely and exactly because we used the bureaucratic method of determining the rules by which we do so.

We'd all be much better served by Which? and the equivalents across Europe devising their own standards and that way we'd be able, through that terribly wasteful market trial and error, be able to zero in on the testing standard that was actually useful.


The effect of Labour's corporation tax

The Labour party has proposed increasing corporation tax to 26%, from its current rate of 19%, and in contrast to the government’s proposed reduction to 17%.

That would leave the UK with a tax rate one and a half times the level the government is proposing, putting us around the middle of European corporate tax rates rather than near the bottom (although still the lowest in the G7).

Labour claims that this will raise around £20 billion to fund various spending commitments.

On a simple mathematical basis, that looks about right.  The Treasury estimates that a 1% increase in the corporation tax rate would raise about £2.3 billion.  Multiply that by Labour’s proposed 9% increase and allow for inflation until 2021 when they propose to implement it, and £20 billion looks reasonable.

The problem is that the economy and business do not remain static while politicians fiddle with the tax rates.  People and companies react to changes; and the bigger the change is, the more they react.

A 9% increase in tax rates therefore is highly unlikely to raise nine times as much as a 1% increase.


Higher rates, lower revenues

One thing that is increasingly well evidenced is that higher tax rates generally result in lower than expected revenues.

This is not just shown by the outcomes of previous tax changes, but is also what we would expect from people reacting to tax changes.  When tax rates are increased, the return on investment is reduced, so there will be less investment and therefore less growth.  If investors and entrepreneurs will see less of the rewards, there will be fewer new businesses started up, less investment in expanding existing businesses, and fewer international businesses deciding to locate in the UK.

The effect of this is difficult to quantify, but to get an idea we can look at the time when corporation tax was last at the 26% proposed by Labour.  That was in 2011/12, and the tax at that level raised around £41 billion[1].  Add on inflation and that would be around £44.5 billion today.  However in fact, with the rate cut to 20%[2], the tax revenues have now soared to almost £50 billion a year.[3]

Although the rate is now significantly lower than it was in 2011, the corporation tax collected is actually higher because the lower tax rates have encouraged companies to set up or expand, or to set up operations in the UK.

If that trend continues, the government’s proposed 17% might raise around £52.5 billion, £8 billion more than it raised when rates were last at Labour’s proposed 26% (all figures at today’s prices).

Assuming that trend works the same in reverse, the proposed rate increase to 26% would be expected to reduce corporation tax revenues by £8 billion, not increase them by £20 billion, as the UK becomes a less attractive place for business investment.


Who bears the pain of corporation tax?

This is not just an abstract matter of changes in an index of GDP.  Nor is it merely a question of whether investors see the value of their investments fall.  The effect will be real and wide-ranging, because any reduction in investment means fewer jobs, and less well-paid jobs, as companies reduce investment and try to cut costs in response to higher taxes.

The Institute for Fiscal Studies responded to Labour’s proposal by saying that “taxes are paid by people” and so corporations do not actually pay tax.  They have been criticised for that by supporters of higher taxes, with one saying the IFS is “so obviously factually wrong … companies are separate legal persons … only they can pay the corporation tax a company owes”.  However that criticism confuses the practicalities of “paying”, transferring money to the tax authority, with an economic concept of payment in the sense of bearing the burden of the tax.

The truth behind the IFS claim is that people, rather than companies, suffer the burden of corporation tax.  Either the company has less wealth (so the shareholder bears the burden), or the company increases its prices to keep its after-tax income the same (so the consumer suffers), or wages are reduced, staff are laid off and new staff are not hired, to cut costs and maintain the same after-tax income (so the workforce bears the pain).

In practice there is a combination of the three.  However, in an open, free economy, there is usually not much scope to increase prices (the business would become uncompetitive), and if shareholders see too much of a cut in their returns then they will invest elsewhere.  That means that the main pain of increasing the corporation tax rate falls on the workforce, as the company seeks to cut costs to maintain its after-tax profits.

And not just the company’s employees that lose out; some of the main losers are young people trying to find their first jobs, only to discover that few companies are hiring because they have cut back on their expansion plans in the face of higher taxes.

Pretty much all economists are agreed on this; the only question is how much of the burden of a corporation tax rise falls on workers rather than shareholders or customers.  However a major study by Oxford University’s Centre for Business Tax[4] concluded that a rise of £100 in corporation tax would reduce wages by £75, through a combination of lower wages and fewer jobs.  Some studies have found even higher tax burdens on the workforce, others lower, but the Oxford study is one of the largest.

If 75% of the burden of increasing the tax rate falls on the workforce, that means that Labour’s proposed £20 billion a year from extra corporation tax receipts would reduce wages by £15 billion a year.

With average private sector wages of just under £26,500[5], that cut in companies’ salary bills is equivalent to over 565,000 jobs.


Knock-on tax losses

If wages are reduced by £15 billion as companies react to higher corporation tax rates, that will also reduce the government’s income tax and national insurance receipts.

On that average private sector wage of £26,500, the government would expect to take around £7,720 through income tax and National Insurance.  That means the lost wages of £15 billion could see a fall of £4.4 billion in the Treasury’s revenue from employment taxes.


Double whammy

Would the fall in wages happen as well as the fall in corporation tax receipts?   Yes, it could, because they are two results of the same process.

As tax rates are increased and companies invest less, because the after-tax rewards are lower, two things happen; company profits are lower, so there is less to tax, and also there are fewer jobs and those that remain are less well paid.

The effect then is potentially disastrous for the Treasury; lower company profits to tax and less employment taxation.  Plus of course the additional welfare costs; benefits for those who are unemployed because of the reduced investment, and in some cases higher tax credits for those who are still in work but on a lower income.

With a potential loss in corporation tax receipts of £8 billion and lost employment taxes of £4.4 billion, the government could be looking at a potential loss of over £12 billion of tax revenues, if this policy were implemented, not to mention the huge financial, social and personal cost of a possible 565,000 people losing (or failing to find) jobs.

The fact is that, although very important to the company, profits are a tiny part of what companies do; far more important are the goods and services that they provide and the employment opportunities they create.  Over-taxing those profits, which may only be a few percent of turnover, risks losing all the other advantages.

Although taxing companies looks like a painless way for the government to raise money, it is far from that; the pain of lost taxes and lost opportunities can be large and widespread.


[1] That figure is based on HMRC data for tax revenues in the later part of 2011/12 and the early part of 2012/13, because corporation tax is mostly paid in the following year.

[2] It is now reduced further to 19%, but because of the timing of when corporation tax is due, the first tax payments under the 19% rate will not be due until the end of 2017.

[3] Source: HM Revenue & Customs – receipts.

[4]The Direct Incidence of Corporate Income Tax on Wages”, Arulampalam, Devereux & Maffini, Oxford, 2009.

[5] National Statistics, “EARN02 – average weekly earnings by sector”, January 2017 (latest finalised data

Maybe there are just too many such graduate teachers?

It is possible to somewhat make fun of these Yale graduate students who are on hunger strike over the terms and conditions of their work. As indeed some other Yale students have, by setting up a barbeque just next to their hunger striking station. The strike itself seems a little weak too, there are reports that anyone who feels really hungry can leave, eat, then come back. It is not eating while hunger striking publicly, rather than not eating apparently.

However, they're right, they have identified something of a major problem:

Unfortunately, this describes little of today’s reality. I knew this going into graduate school, but I went for it anyway, because I wanted to do nothing more than teach English in college the way it was taught to me.


This means two things for people like me, who are graduate teachers. First, it means that universities like Yale depend on us to teach their students but don’t give us any of the job security that the professors have. Second, although Yale says I’m in training to become a professor one day, it’s likely I’ll never have the chance.

Instead, if you check back with me in five or ten years, you’ll probably find me among the many thousands of people who have a PhD but can barely hang on to a place in the middle class. I may not have health insurance through my job, much less paid vacation, an office or any control over my schedule. In fact, it’s likely I won’t even know where my paycheck will come from further out than four months. In academia, you’re now less secure the more experience you accumulate.

Out here in the real world we're really pretty sure that when an occupation leaves you with a paltry income this is the world's way of saying that you should go and do something else. This is true of the business making a loss, the farmer unable to survive without subsidies and yes, the would be worker facing derisory pay as a result of too many other people clamouring to do the same job.

We're even really certain that a professor or two over in the economics department will be able to explain this to people. This is just what happens with an over supply of labour.

But the important, and unsaid, point is why is there such an over supply of said labour? The answer being that there are simply too many graduate students in American universities.

It's worth noting that a PhD over there is not, as it is here, the production of a thesis, the addition to the sum of human knowledge by some small amount. It takes rather longer, up to 7 years, and includes a certain amount of learning how to be a professor. Thus these teaching duties which they undertake. It's not entirely true but it is largely so that an American PhD is the training program to be a university professor in the fullness of time.

Which is where the problem is. The universities are training many more such professors manque than they will ever be able to employ as actual professors. Not just many more but many times more. And thus this problem of those who have this very expensive training but who are unable to grasp the brass ring at the end of it.

The answer is for those graduate programs to shrink considerably. Perhaps some subjects more than others - there's not really a use for advanced degrees in critical studies, gender studies perhaps, outside future employment in academia. And if the training courses are producing more than can be absorbed by the universities then it's the training courses that should be cut, no?  

But back to our basic economics. The bad pay and conditions of these people is a symptom of an over supply of people with this training. The conditions themselves should thus dissuade people from following this non-career path. But at root the diagnosis is simple. There is an over supply, people should be going and doing something else.

Don't forget, absolutely everyone else on the planet has also had to face the idea that there's something they'd love to be doing but there's a woeful shortage of people willing to pay them to do it. Odd that a university system is able to teach that point to its students really.

Cryptocurrency is interesting again

For the last few years, the world of blockchains - i.e., the world of Bitcoin and the technologies derived from it - has been firmly divided into two camps. The first of these, which can broadly be termed "Enterprise blockchain," is a group of companies, including Intel, IBM, and my own firm, Monax, which apply and adapt the ideas of distributed computation which Bitcoin pioneered for enterprise use-cases.

The second of these is the world of the "coins" or cryptocurrencies, Bitcoin and its imitators, which are doing the same thing they have always done: providing a means of value storage and transfer which is uncensorable and beyond the reach of state regulations (which is why Bitcoin has long been the darling of many libertarians). 

By all indications, Bitcoin is booming, with the price of one coin reaching all-time highs of $1,800 this week. Equally interesting, however, is the fact that the "altcoin" ecosystem - that is, Bitcoin's imitators - have exploded in value as well, to the point where their value equals nearly half of the value of the ecosystem as a whole:

OK. But why?

First, a short primer: any blockchain's application architecture is fundamentally different from what most of us use on a daily basis as we access the web. Applications like Dropbox or work e-mail are run on a server somewhere; administrators of those servers are firmly in control of them and place limits on our access rights to their databases, such as storage limits, to ensure that the system's performance is not degraded from overuse. 

Bitcoin, by contrast, is an automatic peer-to-peer system. It runs itself, with the assistance of all of its users, and has no central locus of control. For this reason, a copy of every Bitcoin transaction ever made is stored on every single computer (usually consumer-grade PCs) running the Bitcoin application, and those copies contain all of the rules about who can write to Bitcoin's system - rules which need to be agreed by all the users in advance. The brilliance of Bitcoin's designer(s) is that they wrote the rules in such a way as to obviate the need for human overseers and sophisticated enterprise hardware to run the application.

However, lacking a central enterprise cluster or a human administrator, a paramount architectural concern for Bitcoin is staying usable by preventing the chain from becoming unwieldy in the hands of its (mainly consumer/retail) userbase. This is achieved mainly in two ways; first, only someone holding a Bitcoin is able to write to (transact on) the database. Second, Bitcoin enforces a size limit of one megabyte on the numbers of transactions it will accept in any ten-minute period - a figure that roughly works out to 750 bytes, or 3 transactions, per second. 

Bitcoin has hit this limit. As a result, users are now forced to pay increasingly high fees to use the Bitcoin network (paying transaction processors additional Bitcoins to prioritise their transactions among the many thousands that are queued in a backlog, termed the "mempool," and shown on the chart above).

There are two emerging solutions to this - one technical, one market-driven. There is little consensus about how to approach a technical solution, even among the small group of elite developers who are Bitcoin's most respected maintainers. 

What *is* more or less agreed is that simply increasing transactional throughput is not an option: Bitcoin's transaction history is currently well over 100 *gigabytes* in size, and doubling transactional capacity means it would grow twice as quickly, meaning that re-centralisation a la Dropbox would occur - Bitcoin would grow so large that it could only be run on enterprise infrastructure.

The other option is the market solution, which the chart above appears to show. The cryptocurrency market as a whole is interesting from an economic perspective in that it provides a perfectly transparent sandbox to see what happens when perfectly substitutable goods (Bitcoin clones) that accomplish the exact same thing (unregulated value transfer) in a fully automatic way (distributed state machines which require no human oversight) are placed in a position to compete. As far as an end-user of cryptocurrency software is concerned, whether a c-currency is $3000 in Dogecoin or $3000 in Bitcoin is immaterial; the shop 'round the corner prices its goods in USD/GBP/EUR, so as long as one coin or the other has sufficient liquidity to cash out, this means competition can occur on the basis of speed and transaction fees.  

Which gives the other coins, in their role as fast-followers with smaller size, newer designs and greater community flexibility and incentive to win market share, comparative advantages.

Summing up, what this means is that cryptocurrency is getting interesting again. Not as an investment product (too risky for my taste) or because the technology is sufficiently magical and brilliant that it will eliminate banking (it won’t), but because it shows that even Bitcoin - a machine, which runs itself, and is not operated by any one firm or person - is, reassuringly, forced to cope with the oldest problem in capitalism. 

Chiefly, adapt to the perennial gale of creative destruction, or lose market share and die.

Taking innovation seriously

Matt Ridley made an interesting proposal in his Times column last week. In the piece he discussed the idea of the Her Majesty's Government adopting the innovation principle, which he summarises as "examine every policy, plan or political strategy for the impact it could have on innovation, and if you find evidence that the policy is going to impede it, then drop, change or rethink the thing."

He suggested that the Conservatives ought to "pledge to set up an innovation commission, guided by the innovation principle, whose job is to examine policies and report on their likely impact on innovation?" The Adam Smith Institute typically recoils at the thought of creating yet another quango, but I think it's worth making an exception in this case. If there's one thing in need of more regulation the regulators themselves.

But what would actually change if politicians and regulators were forced to take innovation seriously? Ridley suggests we'd have cheaper, safer food thanks to genetically modified crops and fewer people would smoke as burdensome EU rules on vaping would never get past the innovation commission.

I think there are two other areas where taking innovation seriously would lead to fundamental regulatory changes.

1. The Gig Economy

Innovative start-ups like Uber, TaskRabbit and Deliveroo are creating an on-demand economy that enriches consumers and offers new flexible models of working. Take Uber drivers for example: they're overwhelmingly happy to trade off traditional employment rights for the ability to work when and how long they want. Yet recently an employment tribunal ruled that Uber drivers should be classified as workers and that Uber be forced to pay the minimum wage and offer sick pay. This not only disrupts Uber's entire business model, it's having a chilling effect on other gig economy start-ups who are in a sort of legal limbo.

If regulators and courts were forced to subscribe to a form of the innovation principle, then legally ambiguous innovative workplace arrangements would be be given the benefit of the doubt.

This is because there's an asymmetry between over and under regulation. In medicine, we tend to be more concerned with false negatives than false positives. Better to be over-cautious and provide unnecessary treatment than let a condition get worse. The reverse is true when it comes to regulation. Market forces tend to mitigate the effects of bad behaviour. A monopolist can only keep prices so high before inviting competition, an exploiter can only keep wages so low before they lose workers to other employment opportunities. The costs of failing to crack down on bad behaviour are static and limited.

That's not the case with false positives. Wrongly cracking down on Uber or Deliveroo doesn't simply harm Uber and Deliveroo's shareholders and customers, it also hurts consumers widely by deterring innovators from entering the market providing similar services. Consumers are not just missing out on Uber and Deliveroo but missing out on their unborn competitors. The costs of shooting first and asking questions later are dynamic and unlimited.

2. 'Tech monopolies'

If Theresa May keeps her word, Britain is set to leave the jurisdiction of the European Court of Justice. The ECJ has typically taken an over-active approach to enforcing competition, often confusing market share with market power. If Britain were to take innovation seriously we ought to take an error-cost approach to enforcing competition law.

Judge Easterbrook set out the error-cost approach in his paper 'The Limits of Antitrust'. He shared the insight that false positives were much more harmful than false negatives. Wrongly penalising pro-competitive behaviour is more harmful than failing to act against anti-competitive behaviour. Market forces tend to correct against the latter creating incentives for new entrants to disrupt monopolists.

He observed that errors of both kinds were frequent because distinguishing between pro-competitive and anti-competitive behaviour is intrinsically difficult. It's especially difficult when dealing with new products and business models. Firms often don't fully grasp the full competitive effects of their business practices in advance, rather they employ a trial and error process.

Take Google for example. In 2016 the EU made an (in my view baseless) antitrust complaint against Google relating to its android operating system. But, Google is an excellent example of a firm experimenting with different business models without a clear understanding of their effects on competition. AdSense is responsible for nearly one fifth of Google's total revenue but was famously produced during Google's '20 percent time' where employees are given free range to work on projects of their own choosing. If firms themselves often fail to understand the full implications of product innovation until much later on. How can we expect courts to understand the full competitive effects of innovative business practices?

That's especially the case when dealing with companies like Google where they produce multiple complementary products. Antitrust law expert Geoff Manne highlights the problem with the EU's complaint about Google preinstalling Android apps:

Of course, Google receives some benefit from pre-installing its apps: Doing so provides a chance for the company to realize some return on its massive investments in the Android ecosystem by promoting its own products. Although Google requires many Android device makers to pre-install Google Search and to set it as the default (but not exclusive) search provider on their phones, this is hardly a bad thing: Search helps finance the development of Google’s other (free) apps, as well as (free and open-source) Android itself.
Imagine what might happen if Google were prevented from requiring device makers to pre-install Google Search or the Chrome browser—the apps from which it actually earns substantial revenue—as a condition of pre-installing its other apps on Android devices. Google would likely then charge hardware makers licensing fees to pre-install apps like Gmail and YouTube, the cost of which would be passed along to consumers in the form of higher device prices. This would hardly be a net gain for consumers, given that they already enjoy unrestricted app choice at lower cost today.
Alternatively, Google could vertically integrate like Apple, exercising tighter control over the Android ecosystem. This would be no boon for competing app developers, who are attracted to Android’s openness—just ask Spotify what it thinks of Apple.

A hypothetical innovation commission ought to force regulators to give businesses in markets with high levels of innovation the leeway to experiment with new business models. One way to do that would be to require direct proof of an anticompetitive effect and not merely rely on theoretical harms. Another would be to grant legality per se to new product introductions to remove regulatory uncertainty for innovators.

Innovation massively matters, but often regulations can have chilling effects and deter welfare-enhancing changes. An innovation commission could tip the scales in favour of innovation and prevent employment courts and competition regulators from keeping new products from the market.

Congratulations to the CMA here, congratulations indeed

As we all know bureaucracy is the application of rules to things. Not the application of good sense, logic or even being sensible, but the application of rules. At which point we really do have to say congratulations to the Competition and Markets Authority. For they have decided that it would be better that one small part of the emergency services infrastructure should close down rather than be acquired by a competitor. One the grounds that acquisition would create a monopoly.

No, really, we do not jest:

Vodafone is to shut down its pager business after failing to receive backing from the competition watchdog to sell the dwindling division that relies on old technology popular in the 1980s.

The telecoms group said it was ditching plans to sells the business to Capita’s PageOne, and would instead close it after the Competition and Markets Authority announced plans to launch an in-depth investigation into the deal.

There's no more than a 1,000 or so users of this old system but those include the likes of lifeboat men etc. Pagers have better coverage and are more reliable it appears. And the argument from the CMA is that as PageOne is the only other supplier of such services then of course, on anti-monopoly grounds, it cannot buy its only competitor.

You know, rules is rules and the hell with good sense.

One of the reasons we dislike monopoly in the first place is that we're entirely sure that competition means that people must take account of reality. That they cannot be insulated from the effects of their own stupidity as others will take advantage of it.

So, why is there only the one Competition and Markets Authority?  

Where house prices come from

In the UK, housing is mostly provided by the market.* But supply and demand are not the only concepts you need if you want to understand why London house prices are so high, and indeed why they have been rising. You also need to think about expectations and about interest rates.

When you rent housing, you're just consuming the value of the housing: you get a spot to live somewhere. But property also has an investment value: if you buy it, then it will provide you housing services every year until you sell it. A house is very durable, so the value of the services it provides may change large amounts over the period of its life. Its rent—or rental value, if it's not rented out—will go up and down, both because the owner improves or worsens the property, and because the rest of the world changes so that anything located where it is worth more.

House prices move much more rapidly than rents—both up and down—because of this investment value. The money that you put into the house can be put to other uses: you always have the option of renting, and either investing the cash elsewhere, or not borrowing the money in the first place. So house prices are affected by interest rates, as well as the rates of return on equities and bonds; the cost of borrowing and the return to lending or investing. When interest rates fall, house prices go up even when rents don't rise; when interest rates rise, house prices go down even though rents don't fall.

It is market rates that matter. Before the crisis many banks and building societies offered tracker mortgages that were linked to Bank Rate, and this is still true to a lesser extent. But they linked their actual market rates to Bank Rate because the BoE shifted its headline policy rate exactly when they'd want to shift their rates—in response to market conditions. When this rule broke down, during the crisis, many lenders simply dropped or altered their link. The link between the BoE base rate and house prices is weak, for this reason, but the link between market rates and house prices is very strong.

However, it's not just today's interest rate that matters: homebuyers do not repay their mortgage at today's rate forever; rates typically vary with the times. The unprecedented boom in London prices we are seeing today comes from the unprecedented fall in long-term interest rate expectations—the very same fall that many economists associate with "secular stagnation", the much-hyped idea that productivity growth is falling and can't be raised. And an infinitesimal fraction of private bank funding comes from the Bank of England, borrowed at its base rate: there is little reason to expect that future Bank Rate rises will change this. Instead, it is real market factors, like increasing supplies of savings coming onto the world market from developing countries, and/or poor alternative investment options, driving this expectation of low rates well into the future.

Interest rates—and expected future interest rates—combine with the supply situation—and the expected future supply situation—like two blades of a scissor. If planning rules are loose then a shock to the path of interest rates has little effect on prices: builders just build more to accommodate demand. House prices didn't fluctuate with interest rate trends before British planning rules became much stricter with the 1947 Town and Country Planning Act, and they don't fluctuate much in Houston or Japan, countries with much more liberal regulation on construction. But since we made building hard to do, we've seen large swings in UK house prices with market conditions and rates.

Expectations usually bring tomorrow to today. Unless we keep being shocked by the planning situation—it either gets stricter, or it stays the same but we expected it to get more liberal—then tight supply constraints are probably not to blame for rising house prices. Unless rising demand from foreign and British migrants continually shocks us that probably isn't to blame either. Those both contribute to the level of prices, and, sure, this involves an adjustment period, but most tenancies are not that long, and there are a lot of housing transactions, so the stuff we've known for decades is most likely capitalised in.

Quantitative easing isn't a likely candidate either, except because house prices and rents are higher when we avoid massive economic depressions. Money from quantitative easing doesn't "go into" things in a special way any different from other money. Investors don't suddenly change the fraction of their portfolio they want to hold in property when the Bank of England increases the money supply (slightly). In fact, we have strong evidence of "portfolio balancing"—when gilts become more valuable because of QE, investors sell some, and buy more of other assets to keep their total portfolio held in roughly the same way.

No: QE, immigrants, and even supply constraints probably aren't to blame for recent rises. Rises since, say, 2012, are most likely down to continual surprises in financial markets—expected interest rates trending further and further down than we've expected.

*That's not to say there's a free market: we have stamp duty land tax, council tax, business rates, housing benefit, affordable housing requirements, deep thickets of regulation on what you can, can't, and must do with your property, especially if you rent it out, as well as restrictions on how you can transfer and own properties, not to mention planning restrictions, building codes, and design rules. But, within these constraints, supply and demand interact to provide houses, flats, and rooms to consumers.

The Overseas Development Institute doesn't understand what a subsidy is

Not understanding what a subsidy is, and therefore who is getting it, is a bit of a problem if you decide to write a report about subsidies and who is getting them. Yet this is exactly what the Overseas Development Institute has just pleasured us with. A report which tries to look at subsidies to the use of coal in Europe and the UK. The specifically British numbers are here.

The two major numbers they tot up are not in fact subsidies to coal at all.

One is the reduced rate of VAT on the domestic use of heat and power. We can, if we like, call this a subsidy on the use of heat and power. We would hesitate to do so on the grounds that not taxing the hell out of something doesn't strike us as a subsidy but there we go. But given that this is specifically a totting up of subsidies to coal, as against other methods of energy generation, this isn't a subsidy to coal, is it? For nuclear, solar, wind power,  natural gas, all receive exactly the same subsidy. 

And we are really very sure indeed that the reduced VAT on domestic electricity usage is never recorded as a subsidy to wind or solar installations. We know this because we've been and looked and read the reports.

The second mistake is worse. They include capacity payments as a subsidy to coal. So also the balancing reserve. Sure, the payments go to coal plants but they're not a subsidy to coal at all. They're a subsidy to solar and wind.

For the reason for the existence of the payments is that the sun does not shine all the time (there's even something called "night" to be taken into consideration) and the wind does not always blow. It's thus the technical inefficiency of these two renewables which requires that we have some rusting hulk somewhere capable of giving us electricity when we desire it. Such payments thus need to be on the other side of our ledger, these are subsidies to that Green Power, not the old fossil fuels.

So, well done to the Overseas Development Institute there.

Still, four people got to collect wages from the Oak and Hewlett Foundations while producing this pap so that's alright then, isn't it?


The strange death of Labour England

After just over 100 years, the stage might be set for the final eclipse of the Labour Party.  It could easily happen that Labour will lose heavily in the coming election, not least because of the leadership, or lack of it, of Jeremy Corbyn.  

From their current 229 seats, Labour could be down to 180 or even fewer, depending how well the polling data represents real voting intention.  Normally a party leader would resign after so catastrophic defeat, but Jeremy Corbyn is no normal leader.  If he chooses to stay on, he might be challenged for leader.  If so, he would be on the ballot as the incumbent, and would probably gain enough Momentum votes to remain leader.

At this point, since he refused to leave the party, it might well leave him.  140 Labour MPs might decide to form a separate party, perhaps called “Centre Left Labour” or something similar. Anything that included the word “Labour” might be subject to legal challenge, though.

This party would be the main opposition party.  Its leader would be Leader of the Opposition and would receive the salary and status that goes with it, plus the office space and the financial support.  He or she would face the Prime Minister at PMQs, and would receive the media attention merited by the opposition.

Jeremy Corbyn’s rump of maybe 40 MPs would be consigned to back bench obscurity, not even the third largest party, which would be the SNP.  People would draw comparisons to the Social Democratic rebellion from Labour in the 1980s, but the circumstances are vastly different.  They were not the main party of opposition, commanding the finance and attention that accompanies that.  Nor was the official Labour Party as discredited as this one is now.

The new centre left opposition party that inherited Labour’s mantle might take more than one election to become a credible alternative governing party, but the Corbynite rump on the back benches would gradually disappear from the political stage, and after a century of influence, the Labour Party itself would head into history.  It could happen.

Baumol's Cost Disease isn't quite what everyone thinks it is

William Baumol has just died and we must insist that the part of his economics we like the best is his investigation of entrepreneurship and technological advance. For his result gives us the background and theory as to why the empirical observation that it is freedom and markets Wot Does It is true.

But then we all know that.. It's the part of his work that all too many don't quite get which is our concern, the Cost Disease argument. The result is that services will become more expensive relative to manufactures as a society gets richer. The cause is that a richer society means higher labour wages - this is obvious, higher wages is the same thing as saying a richer society. Manufactures have some amount of labour embedded in them as do services.

But one of the ways that a society becomes richer is that we automate more of that manufacturing, thus having less labour embedded in our manufactures, while services don't undergo quite the same transformation. Thus, as labour becomes more expensive, the manufactures with ever less labour in them become cheaper relative to the services which retain about that same labour contribution. Agreed that's not quite the way it is usually presented but it's an explanation we find easy to understand ourselves.

The classic example of this, from Baumol himself, is that it still takes a string quartet exactly the same amount of time to play a piece as it did when Mozart wrote it. We can't make them more efficient by speeding it up. But we've automated much of farming so food is cheaper relative to string quartets than it used to be.

This is then used to go on to show why government will take an ever larger part of the economy, akin to Wagner's Law. Because we get a lot of our services, like health care and education, through government, services become relatively more expensive as we get generally richer et voila, cough up more tax you peasants!

Except there's a piece of Baumol missing from that latter idea. Which is that the true statement of Baumol's Cost Disease is that services will become more expensive relative to manufactures unless we automate services and so turn them into manufactures.

With the string quartet the obvious example is recording them once and then replaying the recording. This does hugely increase the productivity of producing music, even if not of live music. Similarly with health care. Time was when the treatment for a headache was a darkened room and a comely virgin to cool the brow with a damp cloth. This was an extremely low productivity activity for the young maid. We are now very much more efficient in our treatment of headaches for we have invented aspirin. Which is really a mechanisation of the darkened room etc and as a mechanisation something we can increase the productivity of.

Wagner's Law is not thus an inevitability, it's rather a measure of how good, or bad, we are at automating services. It isn't true therefore that government must become an ever larger part of our or any other economy. It could even be that we want it to be, but it isn't inevitable. It depends upon the technological advance of, for medicine say, pill making, for education of video and distance learning. And isn't that just where we think we are? On the cusp of new technologies making those things vastly more efficient and productive?