A typically wise observation from Don Boudreaux

This is also a rather clever observation. We're told that both wealth and income inequality are rising strongly, that this is of course terrible, and that this leads to rioting in the streets and the stringing up of plutocrats from lamp posts. Yet when we look out our windows we see a distressing lack of the wealth swinging gently in the breeze, all the Occupy folk have gone home to polish their nose rings and there just doesn't seem to be a mass frustration with matters at all. How can this be? When the clerisy tell us that the world should be in flames and yet it remains resolutely unburning? The answer is, as Boudreaux points out, that wealth and income inequality are a lot less important than we're told they are:

One reason, I’m sure, is that rising inequality in monetary incomes or wealth is NOT the same thing as rising inequality in economic welfare (extra emphasis intentional). It’s not even close – although rare is the “Progressive” who acknowledges the reality that changes in income (or wealth) are not identical to changes in consumption-ability (that is, to changes in real economic well-being). Inequality of monetarily reckoned income or wealth can rise while inequality of consumption opportunities can fall.

We might want to worry about consumption inequality, if that does indeed become too extreme.But we've not particularly got very much of that in our current society. Sure, the plutocrats can have hot and cold running yachts and £10,000 bottles of champagne. But no one thinks that it's particularly important that they can and we don't. We've not particularly got a shortage of even a serious limitation on what we do care about the consumption of. A roof over our heads, decent food, nice clothes and so on and on. The rich may have nicer pants but they still put them on one leg at a time and they're still only wearing one pair at a time too.

The economically important form of inequality is that of consumption opportunities. And one good reason why we've not got those riots in the streets is simply that we've got a lot less of that than we do income or wealth inequality.

At some point we really do need to tell certain politicians to just toddle off

And that point may have been reached for one of them:

“Supersized” food and drinks should be banned by law in a bid to combat Britain’s obesity epidemic, the new head of the Commons health select committee has said.

What? We're going to have a law now where a willing purchaser cannot negotiate with a willing supplier to gain 600 calories in return for folding money instead of 400 calories for a smaller amount?

What?

Dr Sarah Wollaston, a Conservative MP and former GP, said the state had a “duty to intervene” to protect current and future generations from unhealthy habits threatening to shorten their lives.

This sort of proposed lawmaking does not bode well for the efficacy of open primaries, does it?

The former GP called for a direct ban on “supersized” foods and drinks, so that manufacturers would be restricted to producing chocolate bars, junk food meals and fizzy drinks in standard sizes.

She said: “Why aren’t we taking more direct steps around supersizing? You go into the cinema and someone will ask if you want to supersize for an extra 20p - we don’t need that.”

Here's how things work in a free and liberal society: you don't get to decide what we would like to have. We get to decide what we would like to have. And if we want more chopped gristle for a paltry extra sum of money then we are and should be perfectly at liberty to have that. As are people to be allowed to sell that to us.

That moral point being entirely aside from the practical issues of course. For we're not all entirely stupid and if we want more than the Wollaston Burger we'll order two.

And there's an interesting legal point here as well. Clearly she thinks that we're all too damn stupid to be allowed to decide what to put into our own bodies. Despite their being, you know, ours? OK, so she obviously does think that. But she's an elected politician: one, clearly, elected by people too stupid to know what they'd like to eat. At which point she's not really got all that much authority, does she?

Either she's right and we're all morons and thus she should have no power having been elected by said morons or we're not morons and so she has a moral claim to power. But if we're not morons then banning us from eating a handful of extra french fries isn't necessary, is it?

Perhaps the best we can hope for is that Dr. Wollaston disappears in a puff of of her own self-contradictory logic as with some of Oolon Colluphid's philosophical creations. but lord forbid that she ever gets to write the law for this country.

Are all macroeconomic models actually wrong?

An excellent little spot by Noah Smith on who uses what sort of economic model to do their forecasting:

Suppose you’re a macro investor. If all you want to do is make unconditional forecasts -- say, GDP next quarter – then you can go ahead and use an old-style SEM model, because you only care about correlation, not causation. But suppose you want to make a forecast of the effect of a government policy change -- for example, suppose you want to know how the Fed’s taper will affect growth. In that case, you need to understand causation -- you need to know whether quantitative easing is actually changing people’s behavior in a predictable way, and how.

This is what DSGE models are supposed to do. This is why academic macroeconomists use these models. So why doesn’t anyone in the finance industry use them? Maybe industry is just slow to catch on. But with so many billions upon billions of dollars on the line, and so many DSGE models to choose from, you would think someone at some big bank or macro hedge fund somewhere would be running a DSGE model. And yet after asking around pretty extensively, I can’t find anybody who is.

One unsettling possibility is that the academic macroeconomists of the '70s and '80s simply bit off more than they could chew. Modeling a big thing (like the economy) as the outcome of a bunch of little things (like the decisions of consumers and companies) is a difficult task. Maybe no DSGE is going to do the job. And maybe finance industry people simply realize this.

And at this point we might be able to work out what's wrong with academic macroeconomics. It's not quite economics to simply shout "Follow the money!" but we can adapt that very useful idea of revealed preferences to tell us what's going on here. That useful idea being that we shouldn't look at what people say they'll do but rather at what they actually do. And we can argue that academic economists are trying to successfully predict what is going to happen as a result of changes in government policy if we should so wish to. But combine that with that follow the money idea and we'd expect the financial markets economists to have been subjecting their models to more rigorous testing. After all, real money is at stake, not just whether you manage to get published in one or another journal.

We should admit that this does rather play to our prejudices here. We're not great fans of macroeonomics at all, agreeing with Keynes that in the long run we're all dead but adapting that to insist that in the long run it's all microeconomics. Get incentives and the price system right and pretty much all other economic problems will either solve themselves or shrink to their not being problems that we want or need to worry about.

This of course enrages macroeconomists but as we don't get invited to their parties anyway we can shoulder this burden well enough.

Underneath that jollity though there is a much more serious point. Macroeconomics is really a very under developed approach of looking at the world. We rather take the Hayekian line that it always will be, given the dispersed nature of information and the impossibility of having enough of it in real time to be able to do anything useful with it. But that there's pretty much no one macro theory that you could get all macroeconomists to sign up to is another indication that it's really just not ready for prime time yet.

And if it's not ready for prime time then we really shouldn't be using it to try and guide our actions on the economy. We should, therefore, concentrate our efforts on those areas where we do know we've largely got the appropriate and necessary knowledge, about those incentives and that price structure.

Remind us again why government should run all the schools

This story might cause a little pause for thought:

One of the most vivid arithmetic failings displayed by Americans occurred in the early 1980s, when the A&W restaurant chain released a new hamburger to rival the McDonald’s Quarter Pounder. With a third-pound of beef, the A&W burger had more meat than the Quarter Pounder; in taste tests, customers preferred A&W’s burger. And it was less expensive. A lavish A&W television and radio marketing campaign cited these benefits. Yet instead of leaping at the great value, customers snubbed it.

Only when the company held customer focus groups did it become clear why. The Third Pounder presented the American public with a test in fractions. And we failed. Misunderstanding the value of one-third, customers believed they were being overcharged. Why, they asked the researchers, should they pay the same amount for a third of a pound of meat as they did for a quarter-pound of meat at McDonald’s. The “4” in “¼,” larger than the “3” in “⅓,” led them astray.

That story's too good to want to check if it's actually true or not. But if it is then why would we continue with an education system that has had more than a century to try to get things right but has manifestly failed to do so?

Quite, Gove and others are onto the right sort of policy, freeing the education system as much as possible from that dead hand of said state.

What joy, it's Marianna Mazzucato again

This time she's running a conference telling us all how it's absolutely vital that the UK economy be planned the way that Ms. Mazzucato thinks it ought to be. Which is, if we are fair about it, a plan that rather ignores one of the most basic economic points about economies:

This is encouraging news and shows that the UK is hopefully on the path towards ‘rebalancing’ away from an economy biased towards financial services, towards growth of innovation and productivity in the ‘real economy’.

Hmm. For this to be either true or desirable we'd need to show that we actually have an economy biased towards financial services.

The key problem that he and other international policy makers have is to make sure that such rebalancing tackles finance on two equally important sides. On the one hand, rebalancing so that finance funds the real economy. This means addressing the dire situation that figure 1 shows below, i.e. the degree to which finance has been financing itself leading to the exponential rise in the value added made up of financial intermediation, compared to that of the real economy (everything but finance and agriculture).

Hmm, so, OK, finance has been a greater part of the value added in the economy in recent times. It's still difficult to understand why this is a bad idea.

The second key issue that rebalancing must address is not just how to get more value added from the ‘real economy’ and less from ‘financial intermediation’ (finance financing finance), but also how to de-financialise the real economy itself!

Hmm again.

So, back to this question of whether the UK economy is in fact excessively financialised. And there's two parts to that question. In the general economy we're no more financialised than other advanced economies. We have roughly the same sized pensions industry, insurance and retail and commercial banking industries, mortgages, savings products and all the rest. And we need only invoke Maslow's Hierarchy of Needs to see why a richer nation might want more of such financial activity. Once the basic needs are met we move on to wanting to have security which is exactly what savings and insurance do for us.

But it is also true that the total financial sector in the UK is larger than it is in most other countries. Almost nowhere else has anything even remotely comparable to The City. but to say that is a problem would be to make the poor departed spirit of David Ricardo cry. For we do seem to have a comparative advantage in being the financial marketplace for the world and that's an advantage that we should be exploiting.

So if we look at the domestic economy we don't seem to be excessively financialised. And if we look at the total economy that financialisation is about our successfully selling services to Johnny Foreigner. Neither of which are obviously problems that require solutions. Making Ms. Mazzucato's conference, and possibly the good professor herself, somewhat redundant.

John Blundell, 1952—2014

The Institute has lost a talented and much valued friend, and those who work to spread economic and personal liberty have lost a staunch and effective campaigner. From the ASI's foundation in 1977, we worked with John, who was then Press & Parliamentary Officer for Federation of Small Businesses. During his spell in that post from 1977 - 1982, he was also a Lambeth Councillor, and combined knowledge of what worked for business with deep insights into the workings of local government. He was a leading figure among the very small band who worked to restore free markets and opportunities to a nation worn down by years of centralism and state planning. He engineered a joint publication between the ASI and the Federation of Small Businesses in 1979. Called "An Inspector at the Door," it detailed the various powers of officials to enter premises and seize materials. It was a media sensation, with numerous articles about Britain's "Society of Snoopers." Margaret Thatcher expressed her concern in Parliament, and set up a commission to review and curtail some of those powers.

It was an early example of John's effectiveness and his skills as an organizer and a communicator. Those skills saw him in good stead when he went to the US, where he became President of the Institute for Humane Studies, the Atlas Economic Research Foundation, the Charles G Koch Foundation, and the Claude R Lambe Foundation.

His appointment in 1993 as Director General of the Institute of Economic Affairs was an inspired one. He rapidly reinvigorated the IEA and restored it to its former glory and influence. Assiduously he built up its network of supporters and its range of influential publications. John's own temperament, outgoing and enthusiastic, helped turn the IEA's meetings into ones not to be missed. John's benign presence not only left its stamp on the IEA, but on the numerous outside bodies that he generously helped to build up and support. Internationally he helped to establish other institutes, and was a stalwart of the Mont Pelerin Society, founded by F A Hayek to propagate liberal, free-market ideas.

John had many publications to his credit, including "Waging the War of Ideas" (2003), together with some important works he co-authored or edited. Under his leadership the IEA supported and publicized works by outside bodies, often hosting launches in the IEA's premises. Those premises were transformed during John's tenure, giving the IEA the space it needed for its extended tasks.

He was a good friend and a loyal one. We shall miss his huge personality and his wry humour. He made a major contribution to making the world into a better place, and will deservedly be remembered for that.

Ahhrgh! Terror! The robots are coming to take our jobs!

We've another one of those little horror stories that the robots are coming to take all our jobs. This is a follow up, concerning Europe, on a US report that decided that near half of all jobs could simply disappear to the robots (who are coming to take all our jobs, recall) in the next couple of decades. Sadly, both reports fail to note one obvious and simple fact:

Having obtained these risks of computerisation per ISCO job, we combine these with European employment data broken up according to ISCO-defined sectors. This was done using the ILO data which is based on the 2012 EU Labour Force Survey. From this, we generate an overall index of computerisation risk equivalent to the proportion of total employment likely to be challenged significantly by technological advances in the next decade or two across the entirety of EU-28.

The answer being, no not 42, more than 50% of all jobs are threatened by technological obsolescence in the EU over that next couple of decades.

Is this something we should be worried about? Clearly the authors of the paper think it worth bringing to our attention, but is it actually worth worrying about?

Well, no. Because even the most slerotic of European economies is going to destroy and create more jobs than that over that same time period.

Using the UK as a rough example, there are around 30 million jobs in the economy. 3 million of these are destroyed each year: around 10%. The economy also creates around 3 million jobs a year. Roughly you understand: and a recession isn't, in general, when more jobs get destroyed, a recession is when fewer jobs get created, that's what makes the unemployment rolls go up.

So the claim is that 50% of jobs in the EU might get destroyed by robot competition in the next two decades. And yet we would expect, just as a straight line estimate, that the EU economy will destroy and create four times as many jobs as that over that same time period, 200% of the current static workforce.

Even if this is something that we want to worry about it's a worry at the margin, it's a little bit more of a known and understood process that we can in general observe that we can deal with, rather than some horrific step change in our lives that we'll have trouble adapting to.

There is one more point here. If you do want to worry about this it's important to note that it's not large companies that create jobs, it's new and small ones. So, if you want to make sure that the robotic unemploymentaggeddon doesn't in fact carve a swathe through Europe you'll need to reduce the regulatory and legal burdens that new companies face in establishing themselves. Deregulation, ease of entry into the market, these are the solutions even if you do want to panic.

Goodbye, Green Belt!

Last night BBC London News aired a short film I took part in about the Green Belt. As part of a series of ‘authored’ pieces about various solutions to London’s housing crisis, I suggested that we should allow construction on the Green Belt around London to increase the supply of developable land. Land, as Paul Cheshire likes to point out, is the key. The graph above shows how closely house price rises have tracked land price rises. Land-use restrictions on the Green Belt are quite strict: under the National Planning Policy Framework, local councils face a very high burden of proof to approve new developments on Green Belt land. If they were made less strict, then the supply of land and housing would increase and the price of both would fall.

I usually think of people who want to preserve the Green Belt as being motivated by financial considerations. If you own your house, you don’t want its value to fall, so you have a strong incentive to oppose any measure that will increase supply. Perhaps a large proportion of people involved in campaigns to ‘protect the Green Belt’ own their own homes. (And if not, that would certainly falsify this view.)

But filming with the BBC made me realize that this explanation is too neat and too unfair. The preservationist I interviewed, Dr Ann Goddard, was not preoccupied with preserving the value of her home – she believed, as many do, that relatively unspoiled natural areas are valuable and important to protect from development. The meadow she took us to was very pretty and I would regret losing places like it as well. Throughout our conversation Ann made it clear that her idea of England was entwined with its image as a ‘green and pleasant land’, not just somewhere for endless suburban sprawl.

Much of that greenery is worth keeping, but I suggest that the question is not ‘what’ but ‘where’. Since Green Belt land rings cities, it is much more difficult for city slickers to access than, say, gardens or parks. And lots of London already is covered in gardens or parks – more than half, according to one estimate. Allowing London to expand outwards would eat away at the Green Belt, but also allow more people to have gardens and for more (and bigger) parks to be built.

I also realized how important symbols can be: to Ann the meadow we went to WAS the Green Belt. If we’d taken her to a piece of intensive farmland (34% of the Green Belt around London) maybe she would have cared less about the prospect of that being turned into a village. And I wonder if focusing on intensive farmland is the key to changing people’s minds. In the end, if the battle over the Green Belt is about ideas and symbols rather than pocketbooks, a change of language might help us.

A masterly piece of political game theory

This is a subject of some controversy so please, put aside your thoughts, passions and logic on the subject itself, abortion, and instead just think about the political tactic being employed here. In general in the US it is the left that is strongly in favour of the right to abort. In general again, it's generally the conservative right that is against. Also, again in general, it is the left that is in favour of detailed and sometimes expensive regulation of activity and it's the right which is against. So, what would be a useful political tactic if you were against the general availability of abortion? Quite, regulate it:

The last restriction under the law goes into effect Sept. 1. All abortion clinics at that point must have upgraded their facilities to ambulatory surgery centers. Busby says many can’t afford it and more will close.

“This would basically force all the clinics to become mini-hospitals,” Busby said. “They have to have hallway widths a certain length, and a janitor’s closet, male and female locker rooms, which is completely unnecessary – and a bunch of other regulations that are really not appropriate or do anything to increase the safety of one of the safest procedures in the country.”

Pro-life groups supported the law, saying it would protect women by making abortion safer. At the time of the passage of the law, The Texas Tribune quoted Republican state Sen. Donna Campbell saying: “There’s nothing in this legislation that will close a clinic. … That’s up to the clinic. If they want to put profit over a person, that’s up to them.”

The right has been saying for years that regulations can be expensive and those who would regulate have been shouting that that's nonsense for the same amount of time. Rather a case of the biter bit.

Sadly, of course, no one is going to learn anything from this. Certainly not those who generally propose regulation: for do note that while they argue that clinics should not be subject to this level of regulation they're not, not at all, arguing that mini-hospitals can be trusted to work out whether they need a janitor's closet for themselves. Still regulation for thee even if not for me.

Time for a human rights review?

The Times law report (15^th July) concerned a Muslim school-age immigrant, granted asylum in France, who had come to the UK instead on the grounds that she was not permitted to wear the burka in French schools. She claimed that to be a human right and therefore the Home Secretary was wrong in seeking her return to France. The rights and wrongs of human rights and clothing indicating religion are not my concern.  The issue here is the extent to which foreigners are entitled to legal representation to fight their cases at UK taxpayers’ expense.  Some lawyers claim that justice has no price but can that really be so?

In this case, Mr Justice Hickinbottom refused a judicial review of the Home Secretary’s decision.  On 24^th June, the Court of Appeal, being the Master of the Rolls and two other Lord Justices, resoundingly supported the earlier judgment.  The appellant needed to show that there was a “flagrant violation” of the European Convention on Human Rights.  In this case, there was no violation at all, never mind flagrant.

Although the report does not say so, it is hard to believe that this school-age asylum seeker had the funds to cover the original hearing, still less the appeal. Perhaps we will be paying for a further appeal to the European Court of Human Rights itself even though the ECHR has already ruled several times that France is entitled to ban the burka in schools so long as it does not do so in general.  Other forms of education are available, e.g. distance learning.

Some will feel that an asylum seeker is lucky to be accepted at all and such acceptance should not entitle them, free of charge, to the full panoply of rights built up and paid for by the citizens.  Obviously as time goes by and they integrate, so their rights should build up but not immediately and certainly not before they have gained admission.

One solution would be to require asylum seekers as part of their acceptance to sign, with legal advice, a binding agreement that they are not entitled to legal aid until assimilated into the country as defined by learning the language to conversational level, paying UK taxes for, say, five years and not being found guilty of a crime normally punishable by a prison sentence.

Some will say that the last is both unfair and inefficient.  In effect they would be deemed guilty before being judged and self-defence by someone without the language would clog up the courts.  But the present system lands the UK taxpayer with the not inconsiderable cost of prison followed by a failure to expel them, as we legally can, because deportation is appealed and the Home Office is overwhelmed by cases.  The UK taxpayer funds not only the legal costs of asylum seekers’ “rights” but all the associated civil service, police and imprisonment costs.

Time for a review?