We have cars because they have net benefits, not ban them because they have costs

Abi Wilkinson - admittedly, not unusually for someone in The Guardian - entirely forgets the most basic economics. She's missed opportunity costs:

If petrol and diesel vehicles were invented today, what possible justification would there be for allowing unchecked ownership? Knowing all we do about the damage wrought by burning fossil fuels – both to our immediate health and to the long-term viability of our habitat – it would seem an act of obscene, destructive decadence. The idea of driving a monstrous, tank-like 4x4 a distance you could easily walk or cycle, and then sitting outside a school (a school!) with the engine still running, guzzling petrol and burping out poison into the surrounding air, would be seen as actively malevolent.

 If such vehicles were allowed at all, they would surely be strictly regulated. Disabled people might be able to claim special dispensation because of the unique mobility difficulties they face. And perhaps people who live in very rural areas might also be permitted to own vehicles, on the basis that regular public transport isn’t viable. Certainly, things wouldn’t be like they are now.

We would add that the important people - whether we call them the peoples' commissars, politicians or gauleiters - would obviously have a car in this Brave New World.

But the basic error here is much deeper than that. Sure, we're entirely willing to agree that cars have costs, pollution among them - we are the people who touted the congestion charge for decades after all. But we would also insist that they have benefits.

We'd all be far poorer if we didn't have the transport made available by the internal combustion engine. Poorer in cash terms and much more importantly in our life choices. Do note that poorer people tend to die earlier so it's not even obvious that the absence of cars would reduce the death rate nor increase lifespans on balance. 

To miss that, to miss opportunity costs, is a signal of being ignorant of the very basics of economics. Further, to argue that we have a solution is an error too. For the outcome of economic study is that, by and large, we don't actually have solutions to anything. We only have trade offs. Are the costs worth the benefits?

Given that absolutely every society ever which has had access to a private and personal form of transport has taken full advantage of that availability we'd have to assume that the people think the costs are worth those benefits. Whatever the peoples' commissars, politicians and or gauleiters believe upon the subject. 

 

Regulating social media threatens free speech and competition

The PM’s ethics watchdog is preparing to call for a major change in the way social media is regulated. It's thought Lord Bew, who chairs the Committee on Standards in Public Life, will recommend that social media firms like Facebook and Twitter should be liable for the content posted on their platforms. In other words, he wants to reclassify social media platforms as publishers, holding them to the same standards as newspapers.

If you care about free speech and innovation, this should worry you. Currently, if someone posts a defamatory comment or shares extremist material on Twitter, they alone (and not Twitter) will be liable for legal damages or criminal prosecution. Twitter may of course choose to ban extremist accounts for violating its Terms of Services, but that decision lies with Twitter alone. If the law changes, then Twitter could be held liable if it fails to rapidly take down the offending content.

This may seem like a small change, but it would have massive implications for the internet ecosystem.

David Post, a professor specialising in internet law, makes the case that an obscure provision of the 1996 Telecommunications Reform act has been essential to the growth of platforms like Facebook, Twitter, YouTube and Tumblr.

The provision “immunizes all online “content intermediaries” from a vast range of legal liability that could have been imposed upon them, under pre-1996 law, for unlawful or tortious content provided by their users — liability for libel, defamation, infliction of emotional distress, commercial disparagement, distribution of sexually explicit material, threats or any other causes of action that impose liability on those who, though not the source themselves of the offending content, act to “publish” or “distribute” it.”

He argues that treating web firms as platforms and not publishers “created a trillion or so dollars of value”. Imagine if Facebook, Tumblr, Twitter and YouTube were liable to be sued or fined, whenever a user posted extremist, racist, or defamatory material. “The potential liability that would arise from allowing users to freely exchange information with one another, at this scale, would have been astronomical”. It’s easy to imagine venture capitalists passing up an opportunity to invest in Facebook, Twitter and YouTube at an early stage with those risks.

Eric Goldman, another online law professor, argues that treating online platforms as publishers will reduce competition and entrench major players. Under the current law, “new entrants can challenge the marketplace leaders without having to match the incumbents’ editorial investments or incurring fatal liability risks.”

Beyond the effect on new entrants, there’s a real risk that the free flow of ideas will be restricted by platforms over-enforcing restrictions on extremist and defamatory content. We have already seen multiple cases of platforms overreacting and banning users for seemingly mild violations. For instance, the comedian Marcia Belsky was banned from Facebook for 30 days for saying “men are scum” in response to death and rape threats. Unlike pornographic content, which can be identified algorithmically, identifying hate speech, threats and defamation relies on context. If the potential liability is high and policing abuse is labour intensive, then firms may be incentivised to shoot first and ask questions later. That could have a chilling effect on free speech.

Lord Bew may be frustrated by what he believes is inaction by social media companies (despite the fact that over 100,000 people worldwide are employed in content moderation). But, he shouldn’t risk throwing the baby out with the bath water. The result of treating online firms as publishers would be to reduce competition, deter innovation, and threaten the free flow of ideas online.

A foolish complaint about capitalism

This is one of those mistakes about the world, the economics of the world, that causes us physical pain. It's like fingernails down the blackboard, something that causes a wince at the least. The idea that money paid out of a company somehow disappears:  

Gary Cohn, Trump’s chief economic adviser, told CNBC on Friday that tax cuts will usher in a long period of wage growth. The White House Council of Economic Advisers has said the proposed corporate rate cut to 20 percent from 35 percent, combined with full expensing for capital investments, would increase average household incomes by at least $4,000 a year after a decade.

Try telling that to the C suite. Many executives view repaying investors as a higher priority than increasing wages or hiring. Honeywell, Coca-Cola, Amgen and others have said they will use any tax windfall in part to boost dividends, share buybacks and debt repayment. Hilton’s chief executive echoed those comments on Thursday.

Well, yes, OK, but what happens next? 

There are only two things that can be done with money, it can be spent or it can be invested. No one does stick it in vault. So, what will happen with this money sent to shareholders is that it will be spent or invested. For nothing else can or will be done with it.

The error here, and it is both a common one and one that makes us cringe, is to believe that money which is paid in tax, or which remains within extant companies, is productive while that held by individuals is not. For that is what is being said here.

If the money stays inside the company, is not paid to shareholders, or it is paid to the government in tax, then it will be either spent or invested in a manner which grows the economy. But if it is in the hands of individuals, in their guise as shareholders having sold stock into a buyback, or received dividends, then somehow, magically, it becomes unproductive. This is nonsense.

Those individuals can only either spend or invest this money. Even if they just buy some other extant asset then the person who sold that has the same and only the same choice, spend or invest. And let's be frank about this, the money to invest in companies not yet extant does indeed have to come from somewhere, doesn't it? Extant companies not being greatly known for investing in those who would disrupt them to our but not their benefit.

The money-go-round doesn't stop, whoever has it can only spend or invest it, there are no other choices. Thus complaining that a tax cut might lead to shareholders gaining more is ludicrous, for the money isn't destroyed nor does it leave the economy. It can only be, and it only will be, either spent or invested. If it's spent then there's an increase in demand, if it's invested then there's an increase in investment. Which is rather the point, this is what we want. Less to be going into the maw of government and more in demand or investment.

Oh, and by taxing the results of investment less we're increasing the incentives for investment which is why we're cutting taxes on the results of investment in the first place.

That shareholders get sent money if we tax investment returns less isn't therefore a problem, however common the wailing about it is, it's the damn point. 

The Star Wars universe doesn't make sense

Star Wars makes perfect sense at one level of course. We humans like to see the hero being oppressed then winning, it's one of the basic mythologies of our species. However, it also has to be said that the Star Wars universe doesn't make any economic sense:

Yet the existence of slavery in the Star Wars universe is itself something of a mystery. Yes, economic historians have come around to the view that Southern slavery in the U.S. very likely was profitable, whether or not it was sustainable. But in a technologically advanced galaxy, exactly why human slave labor should be more profitable than droid labor is not entirely clear. One would think that robot miners, for instance, would work more efficiently than humans, and with considerably less attrition. But in the Star Wars universe, mining is done by human slaves.

As Adam Smith himself was pointing out paid labour is more productive than slave at anything above the most basic human grunt work. Something that just doesn't have to be done by human or animal muscle power in a society with any form of technological advancement at all. Even today's protested versions of slavery aren't that straight chattel form and even then, again, they're restricted to the most basic of tasks.

The thing being that for all its vileness slavery just isn't economic given any modicum of technology.

But the fictional universe still doesn't make sense even after that. In the same way that Red Mars from Kim Stanley Robinson doesn't. They both have people poorer than today's - agreed, rich world - society in a more technologically advanced scenario. This isn't one of the possible outcomes.

Assume that the machines are doing very much more - that's what technological advancement means. There will be more for all to consume therefore - no one can be poorer.

Or perhaps we then posit that only some gain the production of the machines. Analagous to the current complaints that the capitalists will get all the output of the robots and the rest of us will be wandering bereft and jobless. Thus the rich get richer and the poor get poorer. This isn't, as we say, a possible outcome.

For think what happens. The machines do much but we out here don't get any of that. So, what will we be doing? We'll be doing exactly what we are now of course. Producing things that other humans consume, consuming what other humans produce. Sure, those consuming the production of the machines will be very much better off than we are but we cannot be poorer than we are today. Simply because we can produce and consume what we do now without that next generation of machines and therefore we will.

There is no manner in which a more technologically advanced civilisation can leave some portion of us worse off than we are now. Yes, OK, it doesn't matter as a background to a myth in which the hero triumphs but it does when we consider what we need to do about our own futures. Even at the worst the robots cannot make us worse off.

A health care system diagnosis that doesn't really work

We are told that some patients in hospitals in poor countries are held hostage after their treatment. They are held until their medical bills are paid. Distressing no doubt, even something that something must be done about. But the diagnosis of the underlying point is in error:

“This is a systemic problem, and the number of rights abuses is quite profound: people are being detained without trial, they’re being locked up with security guards, and women are giving birth to babies who are entering the world, in effect, as prisoners,” said Robert Yates, project director at the Centre on Global Health Security, who co-authored the paper.

“Healthcare user fees are at the root of the problem, and this just shows how bad a privately financed health system can get. We need to do more research on this and the global health community needs to start taking this seriously.”

There is a doubling down on this same point:

“Healthcare really needs to be free of charge to the patient, because this is the consequence of making patients pay, and it is the worst situation in a whole range of very difficult situations: they may get the medical care they need but then they, or their belongings or their ID papers, are kept hostage,” said Dr Mit Philips, health policy advisor at Médecins sans Frontières.

“Unfortunately, because many of these health facilities don’t receive sufficient funding to provide adequate care even when patients can afford to pay, this is the kind of economic logic that results. If we’re serious about universal health coverage, then abolishing user fees would be a good place to start.”

As we say, this diagnosis is wrong. For it is our own National Health Service which is the outlier here, one of the very few systems that has no user fees, indeed appears to have no system nor ability to make sure that those who really should be paying them do so. Most, somewhere between the majority and near all, rich world health care systems do have some requirement for such users fees. Yet said rich world systems do not keep patients locked in hospital until those bills are paid.

It is therefore not the system of user fees which leads to the practice, is it? 

What is the reason is one of those things we can discuss. Possibly the absence of a legal and efficient debt collection system. Could be the general poverty in these places meaning that routine health care is hugely costly as compared to average incomes. Might be the manner in which all too much of a nation's government spending gets creamed off by the WaBenzi. We can indeed think of a number of reasons why this is happening.

But given that the majority of rich world systems have some form of user fee, that said majority doesn't keep patients hostage until bills are paid, then it's not user fees being the underlying cause of the problem, is it? 

Therefore the abolition of them isn't the solution.

We do find this productivity story amusing

Apparently it is just terrible that market competition is going to lead to some Asda workers losing or changing their jobs:

More than 800 senior Asda shopfloor workers are facing a pay cut or redundancy in the new year after the supermarket chain embarked on another cost-cutting exercise.

Store staff have been briefed this week on a proposal that could mean 842 section leaders being removed from its store management teams. Thousands of other workers will also be affected by a wider move to cut the number of hours spent on stacking and tidying shelves at 600 supermarkets.

In a document given to staff, and seen by the Guardian, the retailer said it needed to cut costs so it could “close the price gap” with rivals Aldi and Lidl.

It said: “We need to continuously review our operating model. … being the cheapest of the big four is no longer a viable business model. We need to be able to look at ways to reduce our operating costs in order to close the price gap.”

No, that's not the amusing part.,What is amusing is to compare this with the very loud complaints currently being made about British productivity.

For this is exactly the sort of thing which increases productivity, that very thing which all are shouting must be improved. To use less labour to perform a task is the very definition of increased labour productivity. So, why isn't this being hailed as a - partial to be sure - solution to what ails our economy? 

Note also how this comes about. Aldi and Lidl have shown that the Great British Public appears to be just fine with hauling their comestibles out of their packing boxes, not actually requiring teams to shelf stock for them. The competition from that lower labour using - and thus more productive - method of retailing being exactly what is pushing Asda into similarly trying to be more productive in its use of labour. Market competition leads to productivity rises.

Except, of course, when people insist that there's something wrong with anyone increasing the productivity of their use of labour.

Too many zombie companies - support for the Austrian view again

An accurate and useful description of economic models and theories is that there's a nugget at least of truth in each one of them. Yea even unto some of the corners of Marxism, a monopsonist employer of labour is indeed a bad idea. The trick is in deciding which model should be applied to the analysis of which problem and when.

Which brings us to the Austrian view of recessions and their aftermath:

There are as many as 100,000 “zombie companies” holding back the economy by soaking up credit that could be used to finance the businesses of the future, a study has claimed.

The Organisation of Economic Co-operation and Development has assessed the impact on productivity of zombie firms kept on life support by their banks and has found that Britain would be growing more quickly if it encouraged a clearout.

Zombie companies have been cited as one of the reasons for Britain’s weak productivity growth, as they soak up capital that successful businesses could use. The OECD defined zombie firms as being more than ten years old and having “persistent problems meeting their interest payments”.

It added: “Zombie firms represent a drag on productivity growth as they congest markets and divert credit, investment and skills from flowing to more productive and successful firms and contribute to slowing down the diffusion of best practices and new technologies across our economies.”

A crude - very crude indeed - sketch of that Austrian view is that mistakes are made in economies. That's fine, that's what the market is, an error detection machine. But the crucial next part is that those errors must be killed off. Bankruptcy the mechanism by which this happens.

We can and should add in that comment of Warren Buffett's - it's when the tide goes out that you see who has been swimming in the nuddy. When times are generally good, in the upswing of a boom, mistakes can be and are covered up by that general enthusiasm. Recessions are, in this Austrian view, the necessary countervailing force, revealing and wiping out those accumulated errors. All of which is rather what the OECD is saying here. 

The policy implications of this view are harsh - when recession strikes just let it happen. Clear out that dead wood so that asset and production factors can be and are reallocated to more productive uses. Short sharp recessions are the way to deal with it, not ameliorative action which prevents economic pain for that simply extends the time span of said economic pain. 

Agreed, many don't like this view - but as the OECD is pointing out there's more than a nugget of truth to it all the same.

Avocados smashing the case for socialism

Good news everybody! Scientists and capitalists have worked together to save the world (again)! That’s right, our A&E departments across the Western world will no longer be plagued by throngs of millennials who’ve cut their hands preparing their mortgage-breaking breakfasts – for now we'll all be able to buy stoneless avocados. The Tories might not be interested in winning over the hearts, minds or votes of millennials but clearly Marks and Spencers have spotted a gap in the market and are determined to exploit it. 

Innovation comes in many forms: from the over 700 varieties of cheese produced in the United Kingdom (quick nod to Liz Truss’ speechwriter there) to the myriad of insurance contracts brokered and underwritten at Lloyds of London. These innovations come not because government is in the business of writing one-size-fits-all central policy, but precisely because it is not. 

These avocados are a glorious part of the capitalist revolution. No pressure group has demanded them, no party has campaigned for cultivation programmes to develop them, and no grey bureaucrat would have been able to draw in all the various individuals from across the world needed to cultivate, grow and transport them to your shopping basket. 

In fact the British Association of Plastic, Reconstructive and Aesthetic Surgeons demonstrated the lack of imagination in all central planning in their response to the original news of a spike in avocado hand injuries as they said they wanted: “safety-warning labels placed on avocados” as “there is minimal understanding of how to handle them.”

Biologists, farmers, the retailers and now consumers will be free to tackle the negative externality of our increasingly international palate and reduce the unnecessary suffering caused by slicing your hand. They also, helpfully, get rid of the imperfect information that avocados nearly always come with–just how much of this very expensive fruit is pit. All-in-all consumer surplus looks like it is on the up.

Guess what, they do it all because of the profit motive. I just can’t understand why millennials aren’t all rabid capitalists like me!
 

Index funds and monopoly power

Like many other people I have a stocks and shares ISA that puts my money into a set of index funds, which are baskets of investments in every publicly traded company in various stock markets, weighted by the market cap of each company. Effectively, it allows me to invest in ‘the market’ as a whole, with investments proportional to the size and value of the firms as judged by active investors. It is cheaper and less risky than trying to ‘beat the market’ with an active fund manager, and since I believe that financial markets are quite efficient I don’t see much point in trying that anyway.

The two biggest firms that run ‘passive’ funds of this kind, BlackRock and Vanguard, manage over ten trillion dollars between them. An interesting Bloomberg article raises the possibility that this could lead, effectively, to collusion within markets, and create effective monopoly control even in markets that appear to be competitive.

The logic is straightforward enough. If all major players in a sector are part-owned owned by, say, Vanguard, there is an incentive for the owner to instruct firms to compete less and maintain, across the board, higher prices than would be impossible in a competitive market. 

There is some evidence that this is happening: some recent papers suggest that increased ownership by ‘passive’ institutional investors was associated with higher airfares and banking prices in the United States. The airline study is particularly interesting because the data is so rich. Usually separating cause and effect in price rises can be pretty difficult, but since there are so many different airline routes, each effectively operating as a separate market, with such good public data on prices, etc, there’s more scope for like-with-like comparisons that minimise confounders.

Factoring in this kind of ownership, market concentration is ten times greater than what conventional measures suggest is a threshold for anti-competitive activity. Concentration is an indication, not proof, of monopoly power, but prices also rose as well when passive fund ownership rose. When, for example, a privately-owned airline like JetBlue went public and hence became part-owned by the same index funds that part-owned Delta, American Airlines, etc), prices would rise by 3-7% on that route. The study includes several methods of testing causation, including a demonstration that prices are not rising because of greater passenger demand – in fact, passenger volume falls as passive investor ownership rises, consistent with the oligopoly thesis. Similar results were found for banks. 

If this is really what’s going on, then it’s potentially a very big problem. But there are a few questions that linger. Are company managers actually being told by BlackRock and Vanguard that their individual firms’ profits don’t actually matter, and they should try not to rock the boat? Are these investors helping to appoint managers that they expect will be worse than other candidates, intending to depress competition in the sector? 

It’s not even clear that the managers of these funds actually are trying to maximise their funds’ returns, as opposed to straightforwardly managing them and mechanically making sure they’re doing what they’re meant to – reflect the market. So do the fund managers themselves have an incentive to promote maximum returns? The mechanism proposed by Azar et al is less sinister: that firm managers prefer a ‘quiet life’ and won’t act competitively to boost their firms’ profits unless they’re pushed into doing so by their investors, and passive investors are just that – passive. 

Even if all this was right, we’d generally expect this sort of situation to be unstable in markets where entry costs are reasonably low – there is basically money on the table for a firm that is not part-owned by the index funds to come in and grab through more aggressive competition (like privately-owned firms). In sectors where barriers to entry are high, then of course this is less likely to happen in the short run, and it may not happen at all in markets where entry is impossible (eg, utilities markets where adding new infrastructure isn’t possible).

What’s more, though, index funds are usually country-specific – Vanguard has a US fund, a UK fund, and so on, and these are run by different people. Why aren’t foreign firms, which may find it easier to compete than startups, entering these markets if cartel-like behaviour is going on? Here I think it’s important to note that that both airlines and banking, in the United States, have quite strict rules that hurt foreign firms’ ability to compete. Non-US airlines simply are not allowed to run domestic flights in the United States, and the fact that financial regulations are both stringent and in many respects very different to other countries’ may remove the advantage that we’d expect an existing firm to have entering a new market. It could be that in markets like these, this effect takes place, but that it doesn’t generalise outwards.

Or maybe the problem is illusory altogether. A Federal Reserve paper from early 2017 proposed a different way of measuring the effect on competition of common ownership, which tries to estimate in the case of banks how much ‘weight’ firm managers would put on their own firms’ profitability compared to that of their rivals under different levels of common ownership, and finds a very small effect. Another, by one of the same authors, argues that activist investors (who try to influence corporate decisions) are strengthened by passive investors, which would militate against the ‘quiet life’ theory. 

If this is a real issue, there are several options that could fix it. One, proposed by Eric Posner and Glen Weyl, would be to limit how much of a certain ‘industry’ a fund could own or to limit ownership to a single firm in each industry. This would defeat the point of index funds, though – they would cease to be impartial reflections of the market as a whole. A more light-handed approach might be to take away these funds’ voting rights above a certain fraction, so that their influence over firm management was limited but their ability to produce returns and diversify was not. 

Alertness to the dangers of monopoly is important as well, though – if airlines and banks are special cases because of regulation, that is an argument for deregulation that opens up those sectors to greater competition from overseas. If it’s a broader problem, that might not be enough and we may need to intervene in some way. But those eager to rapidly put constraints on passive investment should be careful. Index funds are a convenient and relatively safe way for normal people to invest for the future. The costs of pushing them into a riskier and more volatile sector, or drying up their investment entirely, could well be worse.

Banking for the poor is about savings not borrowings

That the very poor of the world have been largely unbanked is entirely true. As is it almost certainly a good thing that they gain access to banking services. But it's not, not so much at least, the ability to borrow which is most desired, it's the ability to save:

As a sex worker in Kolkata, Rita Roy had no access to her own money. The brothel madam kept her earnings “safe” – shoving the notes into her bra – and whenever Roy needed money, she would never get the full amount she asked for.

Roy, 36, did not have a bank account. When she needed money to treat her father’s heart condition seven years ago, she was forced to visit a loan shark to borrow 2,000 rupees (£23). In one year, 13,000 rupees extra (£150) was due from the interest.

“When I couldn’t repay it, the money lender posted two men outside the kotha[brothel] to harass me every time I went out to shop,” says Roy. But now she has a bank account with the Usha Multipurpose Cooperative Society, which is run by and for sex workers. It began with 13 women pooling their savings – 30,000 rupees – in 1995. Today, the bank’s turnover is 300m rupees a year and it has a membership of 31,000 sex workers from across West Bengal.

We've seen much the same thing in other such adventures, Grameen Bank in Bangladesh, M-Pesa in East Africa. A secure method of transacting is desired, sure, some would like to borrow to invest or consume. But the thing which really has the poor beating down the doors of a financial system is a safe and secure method of savings. 

One lesson of which is that - again - Milton Friedman was right. When a middle aged (for that place she is) woman turning tricks for pennies is looking to save them we think that there must, quite obviously, be a large amount of truth in both the lifetime income hypothesis and in the smoothing of it that people wish to do.

Like so many descriptions of human behaviour we'd not say that it is 100% universal across all people all of the time. But most certainly enough that it's a reasonable description of human behaviour. It also has certain implications for policy - one of the best ways of enabling the poor it to create a system in which they can save, not necessarily borrow.