This is how it works, first you redefine poverty then you find lots of it

Over the decades the definition of poverty has changed, from meaning someone not having very much to someone having less than others. That move from measuring poverty to relative poverty turns it from a measure of actual poverty into one of inequality. The reason this was done is obvious, Britain abolished absolute poverty in the 1930s and where would the left be without something to whine about? 

We are fortunate to be witnessing an attempt to again redefine:

More than a million people in the UK experienced destitution in 2015, including 312,000 children, according to a groundbreaking study by Heriott Watt University academics for the Joseph Rowntree Foundation published last year. It defined destitution in two ways: experience of at least two of six poverty measures over the previous month, including eating fewer than two meals a day for two or more days; or a weekly income after housing costs of £70 for a single adult or £140 for a couple with children. This was an income level below which people “cannot meet their core material needs for basic physiological functioning from their own resources”.

A definition of destitution which defines it as only two meals a day twice a month is rather co-opting a word with a very strong meaning to cover something really quite different. 

We should also note, as we so often do, that this definition is before the things which people other than the state do to alleviate such distress.

What we are seeing here is an attempt to float another redefinition, like that to relative poverty measures, in order to show that there is some vast problem which needs more tax to solve.

Incentives matter, yea even unto death

The first and prime lesson of economics is that incentives matter - grasp that there are always opportunity costs and with those two you've got the basics of the subject nailed - and this extends even to the timing and manner of death

A bizarre trend is said to be afoot in villages bordering the Pilibhit Tiger Reserve (PTR). Authorities suspect local families are sending older members into the forest as tiger prey, and their bodies then relocated to fields, to feign attacks and claim lakhs in compensation from the government.

Villagers aren't entitled to compensation if their kin die in the reserve.

Depending upon how large the compensation is this could be bizarre or not. Put a sufficient number on the head of dead grannies anywhere and elderly women are going to be at risk from their kin. But it is, allegedly at least, not the youngsters offing the elderly in the hops of a payout:

Locals, however, say family elders were willing participants in the whole affair. "They think that since they can't get resources from the forest, this is the only way their families can escape poverty," farmer Jarnail Singh, 60, told TOI.

We also have reasonable evidence that changes in tax law regarding estates can change the timing of death.

The lesson from this being perhaps uncomfortable for the more radical egalitarians among us. Assuming that tiger story is true some people are willing to quite literally sacrifice themselves for their children in just economic terms. Which means that it's really going to be very difficult indeed to reach a society in which parents do not actively conspire to privilege their own children over those of others. Even radical measures like 100% death taxes, a pure insistence upon absolutely equal schooling for everyone, we're still going to have people working to create that inequality.

A society without any form of inherited privilege just isn't going to work because humans ourselves just don't seem to work that way.  

 

As Gary Becker pointed out, prejudice has costs for those who are prejudiced

Gary Becker pointed out that prejudice was costly to the person who was prejudiced. By refusing to hire perfectly reasonable workers just because of the colour of their skin this leaves the employer with less profit than they could have had. In time the knowledge will spread, that these now cheaper because of the discrimination workers are just fine and they will be hired by others less prejudiced. Again, in time for nothing is immediate in a market economy, the prejudiced will find themselves out competed and thus does that prejudice disappear from the workings of the economy even if not the minds of men.

It's worth noting that this was the reason for the Jim Crow laws. The prejudiced used the state to enforce what they knew the market would not.

This applies not just to race of course, it applies to any form of taste discrimination. Which brings us to something fun about the Venture Capital industry:

The vast majority of venture capitalists in the United States are men. But the distribution of women partners across VC firms is not uniform. It turns out that companies whose male senior partners have daughters are more likely to hire women as partners. And according to research published earlier this month by Paul Gompers and Sophie Wang, those companies secure superior investment returns — strong evidence that an irrational opposition to hiring women partners is holding VC firms back.

It is possible to devise reasoning as to why men are just going to be better at being a VC than women. It also seems that such reasoning would be wrong. So, why hasn't this been outcompeted then?

The answer being that "it takes time" bit. The market is a pretty wondrous human institution but it's only in the pages of the wilder textbooks that information is perfect or that things happen instantaneously. This is new information--and we know from the efficient markets hypothesis that markets are indeed efficient at incorporating new information into prices. We should thus expect rather more hiring of female VC partners and executives and thus the diminution of that prejudice.

Assuming the study itself is correct those that don't will lose out. And what the hell do we care about that? This is capitalism, recall, and people are entirely allowed to waste their money their own way. Those who continue in prejudice, once it has been pointed out to us all so that we react, will lose money. And what better way to punish a capitalist than that? 

That is, we don't actually need to do anything other than to prove this very point, that this is taste discrimination, not rational. Once that is known we can confidently expect it to disappear--for exactly the same reason those Jim Crow laws enforcing discrimination existed. Once people know they're losing money they stop doing silly things if only the law will allow them.

Why post-truth Corbyn is wrong about tuition fees

Labour’s pledge to abolish tuition fees was the most memorable and (regrettably) popular policy of the last General Election. Unfortunately, it didn’t receive anywhere near the level of scrutiny it deserved, many outright falsehoods went unchallenged with Theresa May relying on the old ‘Magic Money Tree’ trope that might have worked at the past two elections, but clearly wasn’t enough here.

At Jeremy Corbyn’s post-election rally, he claimed that “fewer working class young people are applying to university. Let's end the debt burden and scrap tuition fees!”. Now I do not know if Corbyn is a cynical liar or merely incompetent – it’s entirely possible he’s both – but what he said was simply not true.

Since tuition fees were brought in the number of disadvantaged students, as measured by eligibility for free school meals, applying to university has actually increased. As Jo Johnson, the Minister for Universities, points out – disadvantaged young people are actually 40% more likely to apply to university now than in 2010.

Of course, you might wonder whether we’d have even more disadvantaged young people going to university if we’d abolished tuition fees altogether. That’s a perfectly reasonable claim. It just so happens to be false.

Scotland, where tuition fees have been abolished since 2007, provides us with an excellent natural experiment. Are we more likely to make progress on getting disadvantaged young people to apply to university with fees abolished? The answer is no.

In 2007, Scotland used to do about as well as England at getting young people from disadvantaged areas to university. But if you track a graph from 2007 to 2015, you see that both nations get better at encouraging students from poorer areas to apply but England does substantially better and the gap between England and Scotland is larger today than it was before fees were abolished.

Interestingly, if you take the same graph but look at young people from advantaged areas instead, you get a very different result. Applications rates for the well-off fell since tuition fees were tripled in England, while they increased for the well-off in Scotland.

If your goal is ensuring that anyone who wants to can go to university then abolishing tuition fees simply won’t work.

Advocates of free tuition typically ignore this evidence and instead frame their arguments in terms of fairness. But there’s nothing fair about free tuition.

Abolishing tuition fees would cost £11bn coming out of general taxation. In other words, people who didn’t benefit from receiving a university education and will most likely earn less than graduates will be forced to pay more in tax to fund well-off graduates. At a time, when we have a £50bn deficit, funding pressures on the NHS, schools and social care, and the highest tax burden in decades, is it really wise to fund a cash transfer that well-off graduates will benefit from the most?

But that’s not the only way it’s unfair. Privately-educated children are much more likely to attend university than children on free school meals. Abolishing fees doesn’t change that (as the evidence from Scotland shows), but it does mean that a greater share of public money will be spent on the children of the well-off.

Another argument that usually crops head up is the ‘public good’ argument. Now when someone says education is a public good they don’t mean it in the traditional economic sense, they mean it in the same way this confused Vox writer does. Essentially, they think that education is a good thing and it’d be better if we saw more of it because it benefits not just the individual but society as a whole. But that’s not an argument for higher education to be fully funded by the state. In fact, tuition fees were originally introduced to increase university funding allowing them to expand the number of spaces on offer. And raising fees to £9,250 a year enabled the government to lift the cap on university places allowing more people than ever to go. The ‘public good’ argument just doesn’t hold water.

The status quo isn’t perfect. We need to ensure that students really are getting value for money. That means equipping them with all the facts. Prospective students should have good quality information about how much they can expect to earn (and to repay) not just a few years on from university but 10-15 years down the line.

The 23 universities where graduates earn less than non-graduates should be named and shamed.

We should also look into broadening the options available to young people. Why not encourage universities to offer two-year degrees to attract students who don't want to pay full fees but still get a quality education?

Abolishing fees would be expensive and unfair, but it'd do nothing to resolve the real problems in higher education.

The latest solution to digital data - nationalise it

We've often wondered what the purpose, the point, of Yvgeny Morozov is. This puzzlement has not been reduced by his latest offering. Those big American tech companies own all our data thus, well, thus something must be done

All of the nation’s data, for example, could accrue to a national data fund, co-owned by all citizens (or, in the case of a pan-European fund, by Europeans). Whoever wants to build new services on top of that data would need to do so in a competitive, heavily regulated environment while paying a corresponding share of their profits for using it. Such a prospect would scare big technology firms much more than the prospect of a fine.

The current approach – let’s have big tech firms swallow as much data as they can and apply competition law to how they design their websites – is toothless. Fixing online shopping is important but not if it accelerates the transition to a perverse form of data feudalism, where the key resource is owned by just one or two corporations.

We're a lot less worried about a company turning a buck by putting together our rampant doughnut habit, our GSP location and the ad from the local baker than we are by the idea that the government owns all this stuff. The temptation to use it to eliminate Bad Thought would seem to be rather greater among those not motivated by lucre and pelf. Governments and such information don't have a good historical record.

And as to feudalism, the definition was that the government owned everything, we all just gaining it upon licence, wasn't it? 

The greater problem though here is economic. The data itself isn't worth anything at all. That's why we all, individually, give it away. It is the very process of collecting and processing it which adds value. There is no value add here other than the systems which do that, those tech giants being the systems that do.

Think of Ricardo and what that means for resource rents. The simple existence of some resource, oil, gold, diamonds say, belongs to no one as no one has actually created that resource. The implication being that the government of the area should tax the simple existence value of the resource until the pips squeak. Revenue's got to come from somewhere, it should come from non-distortionary sources,  taxing what no one has created cannot change the effort into creation, can it? 

But we all also agree that the people who invest capital, effort, time, into developing those resources should indeed profit from having done so. Incentives do matter after all.

At which point, if there is no resource here, only the effort, then what taxation of the resource rent should there be? 

If it is true, as we maintain it is, that it is the collection and processing of the data itself which adds the value then what is there for the government to own?

Somebody really needs to explain the tax system to The Mail and Vince Cable

This is simply absurd from the Daily Mail:

Apple has paid barely 1 per cent tax on its UK sales, despite raking in £7.5billion here since the iPhone launched, a Daily Mail investigation has found.

Britain doesn't have a turnover tax on companies - VAT is paid by the consumer. Britain does have a profits tax and thus whatever the tax paid is determined by those profits, not turnover.

Sadly, Vince Cable gets worse:

Last night, critics said Apple's apparent determination to avoid contributing was a scandal that shamed international business.

Former Lib Dem business secretary Sir Vince Cable said: 'It's absolutely outrageous that the tax base doesn't reflect economic activity and is based on artificial declarations of profits.

'Taxation has become voluntary for these companies, and the tax base has got to change.'

As HMRC has pointed out more than once this is how the current profit tax system operates, it taxes profits where the economic activity which produces them takes place.

Consider what makes Apple's profits. It's not selling a phone after all. We can all go and buy some landfill Android for £20. The reason people buy Apple is some mixture of the brand, the design, the software and so on. All of which are "made" in California. And thus the profits from that are taxed in the US, as the national taxation regime, and in California, the local one, under whatever the rules in place for the taxation of profits there are. No, we don't get to whine about Bermuda, repatriation or whatever, that's all the US tax system, not us.

This is not some failure of the corporate taxation system, this is the very purpose of it. Profits are taxed to reflect the economic activity which produces them. This is what Vince wants, this is what Vince has, so why is he complaining? It couldn't be that he's just a politico on the stump, could it? 

The war on work

When Ed Glaeser writes for City Journal it's always worth reading - take his brilliant takedown of infrastructure spending. His posts are rare but valuable. His latest "The War on Work—and How to End It" is no exception.

In it he sets out how America could significantly increase employment from simplifying welfare to replacing the minimum wage with wage subsidies and fixing vocational educations.

Here are some of my favourite excepts:

We also need to make hiring workers less costly for employers. Temporarily cutting the payroll tax was one of the most constructive policies adopted during the Great Recession. We could enact a permanent payroll-tax reduction. The tax could be gradually phased in for workers once their hourly earnings went beyond a certain threshold. The payroll tax could be eliminated for workers who had been unemployed, at least for an initial period. The costs of reducing the payroll tax could be offset by raising the minimum retirement age for employees who hadn’t paid these taxes for enough years. Reducing mandated benefits, like health care, that employers must provide lower-income earners would help encourage work, too. Ideally, the reform of our health-care system will ensure that workers have health-care options that don’t unduly burden employers.
Making work pay needs one final, major policy initiative: wage support, which would replace the EITC. The EITC had the right overall idea, but it is cumbersome and indirect. Instead, the federal government could simply provide pay to increase the earnings of minimum-wage workers by a fixed amount—say, $3 per hour. Consequently, a worker paid $7.25 would take home $10.25 hourly, with the difference paid for by taxpayers. The subsidy could fall gradually as wages rise, and it could be targeted for specific groups—larger for returning veterans or the long-run jobless—and rise or fall with the level of aggregate unemployment. The phaseout might slightly slow private-sector wage growth, but the cost would be more than offset by the benefits of such a visible push toward employment. Such a program would be expensive, so it should be matched with spending reductions for other social services.

And

We should also improve the way that we do vocational education. (See “Vocational Ed, Reborn,” page 36.) Many vocational schools, like Boston’s Madison Park High School, have long been troubled. The most ambitious students avoid getting tracked onto a vocational path, and they—and their parents—want schools that focus on college readiness. Consequently, less fortunate or struggling students often get segregated into these vocational centers. The conventional teachers in many vocational programs often lack the know-how for teaching either high-paying blue-collar trades, like plumbing, or cutting-edge fields, like computer programming.

A more effective approach might be to keep students in college-readiness-oriented schools and experiment with out-of-school vocational training. Kids could be taught after school, on weekends, and during the summer by programs specializing in particular occupations. These initiatives can be evaluated swiftly—you can readily determine if a program has produced, say, good carpenters. The superior training programs can then be scaled up and bad ones shut down. Adopting this structure would mean that anyone could potentially compete to run the programs—trade unions, private providers, nonprofits—increasing the chances that some programs will excel. We should also be open to initiatives like Cambridge, Massachusetts’s “The Possible Project,” which has been training youths, many from poorer backgrounds, to launch themselves in the start-up economy. (I am currently working on a randomized control trial for the project.)

Read the full piece here.

How Japan gets it right on housing

Japan is often seen as an exotic oddity among the major developed nations. Though not as well known as manga or sushi, the Japanese housing market is no exception.

Japanese architects let their imaginations run free: just look at Reflection of Mineral by Atelier Tekuto. Designers in Japan are not held back by paying homage to history or a desire for extreme longevity. Buyers do not need extensive permission to demolish their house and construct them anew—so they do it a lot. And in spite of government incentives for durable housing, the disposable-home culture has boomed. Projects like Reversible Destiny Lofts indicate a willingness to move rapidly with the times.


Like many Japanese crazes you come across online, these hyper-modernist and experimental schemes are not typical across Japan. In rural areas machiya (traditional wooden housing) is far more common. The price of these houses is surprisingly low, and even falling. The country's population has begun to decline, and rural areas like Kyoto prefecture have seen emigration to the country's capital. The attraction of the hustle and bustle of Tokyo, not to mention its economic dynamism, has pulled resdients away.

In spite of this mass migration, rents property prices in Tokyo have barely changed, and apartments are getting bigger. Relaxed regulations have underwritten a free and elastic housing supply: when there a plot can be put to a better use than it current one, it is legally easy to knock it down, extend it up, or switch it to a new use. Both the relative lack of deference to historical preservation, and the cheap housing, are in stark contrast to the situation in London, San Francisco, or other major metropolieses.

This is creating a sharp divide between rural and urban Japan. Few actually demolish their empty houses in the countryside, due to waste disposal laws that the Japanese government is only now overturning. But there are still around 8 million unoccupied buildings in Japan, according to a government count — a far cry from the British worry about second houses and foreign ownership. Towns with large numbers of abandoned houses have been dubbed ghost towns.

Japan is yet further proof that reports of the death of the traditional city were greatly exaggerated. The job market in urban Japan is still sucking in workers: now 45% of Japan's entire population lives in just three city regions: Tokyo, Osaka and Nagoya. Herd mentality has furthered the divide: the greater the number of people living in an area, the more economic relationships they can have, the more they are paid, and the more stuff they can buy. On top of that, other young people move for fear of being left behind.

The economic disparity is widened by lower levels of "parasite singles" (パラサイトシングル)—those living with their parents well into adulthood—in cities. In Tokyo it is increasingly common for unmarried women to buy or rent flats on their own indefinitely—significant when the group has faced so much stigma for so long. This would be impossible without the low prices and wide choices that such a liberal supply affords.

Japan's housing market is full of contrasts—Tokyo's modern buildings versus machiya, disposable-houses versus ghost towns—but at both ends they've managed to do something the West seems incapable of: keep housing affordable!

Did Microsoft's antitrust prosecutions give us the iPhone? Um, no.

Tom Forth writes about the Microsoft antitrust case (which is my earliest memory of a competition lawsuit, and which I followed with interest as a child). Many of the responses to the EU’s Google ruling have compared it to the Microsoft case, including my own on this blog and in City AM.

He argues that the threat of more antitrust lawsuits were what drove Microsoft to effectively bail out Apple in 1997, when it was close to bankruptcy. Without the $150m injection of cash and commitment to maintain Office software for Macs that Microsoft gave Apple, we’d have had no Apple and hence no iPhone. Keeping Apple afloat allowed Microsoft to point to the existence of a viable rival – so no monopoly and no need for investigation.

It’s a good story, even if it’s a little strange to assume that without Apple, nothing like Apple or the iPhone could have existed – a sort of domino theory of innovation, where ours is the best of all possible worlds. (Tom acknowledges this point, but says he’s just not convinced by it. On Twitter he argues that the lack of competition in English bus services justifies his scepticism.)

But the story Tom tells is basically wrong – it’s the conventional folk history of what happened, sure, but it actually misinterprets the situation with Microsoft at that time. First, note that the $150m cash injection was a relatively trivial sum of money – the real ‘bailout’ came from promising to maintain software support for things like Internet Explorer and Office for Mac.

Microsoft was throwing its weight around in the 1990s. It was blocking the sale of alternatives to its software and demanding that Windows PCs be shipped with other Microsoft products too. But there was such an abundance of complaints that prosecutors decided to focus on what they saw as Microsoft’s most egregious crime: bundling Internet Explorer with Windows.

But this took Apple out of the picture. As Daniel Eran Dilger says:

By narrowing the monopoly case, prosecutors effectively took the majority of business between Apple and Microsoft out of the picture; the existence or disappearance of Apple would simply have made no difference in a trial that revolved primarily around Netscape's Navigator and Microsoft's Internet Explorer on Windows.

Microsoft didn't need to bail out Apple to pretend that the Mac platform was providing effective competition to Windows. Further, doing so would not really help its case, since the existence of the Mac did nothing to put Netscape on OEM PCs or to make it appear that Microsoft had not violated its 1994 consent decree.

Included in the findings of fact is a summarizing statement that demonstrates how little bearing Apple's Mac had on the outcome of the decision:

“Viewed together, three main facts indicate that Microsoft enjoys monopoly power.  First, Microsoft's share of the market for Intel-compatible PC operating systems is extremely large and stable. Second, Microsoft's dominant market share is protected by a high barrier to entry. Third, and largely as a result of that barrier, Microsoft's customers lack a commercially viable alternative to Windows.”

In other words, bailing out Apple was irrelevant to the main lawsuit against Microsoft, including to the judge ruling on the case. (Dilger’s post is fascinating and detailed on this whole affair – I recommend a full reading if this case is interesting to you.)

In fact, antitrust was not the reason Microsoft decided to bother with Apple. 

Further underlining the fact that the agreement had nothing to do with antitrust violations, Microsoft demanded that Apple make Internet Explorer the default web browser on the Mac. If the company was at all worried about its monopoly case, such a deal would be an absurd way to create the appearance of an open market. 

Far from bailing out Apple to avoid the appearance of a monopoly, they were trying to use Apple to squeeze Netscape – a quarter of whom were Mac users – in the browser space even more! Microsoft’s bailout was for the exact opposite of what Tom claims.

The real reasons were to do with expanding Microsoft software usage to make money and to defuse impending lawsuits from Apple. Apple had amassed a large patent warchest and was reported to be planning to sue Microsoft for patent infringement and for using stolen code for its video processing on Windows

To head these off, Microsoft wanted to tie Apple users into its software more (Internet Explorer and Office) and give Apple a series of sweeteners to persuade it to drop the lawsuits. Bailing out Apple wasn’t relevant to Microsoft’s monopoly lawsuits. It was driven by a desire to be more monopolistic and to avoid being sued for intellectual property theft by Apple. 

Whether the actual Microsoft antitrust case was justified is a discussion for another post. A few points, though: I agree with Lawrence Lessig, one of the regulators behind and Special Master during the lawsuit, that history has proved it to have been misguided – the emergence of Linux shows that the operating system space can be competitive even if a dominant firm is being extremely aggressive in trying to destroy its competitors. 

In my previous post I explained why competition within a software platform doesn’t matter if there is or can be competition between platforms. And Thomas Hazlett has shown that antitrust lawsuits against Microsoft lowered the overall value of the computer industry – a sign that the enforcement has not been good for the sector as a whole.

But the folk story that Tom cites is widely misunderstood, and misses the real dynamics of why Microsoft helped to bail out Apple. I hope people aren’t misled by it.