Will more govt spending on childcare really help?

The UK government is expected to make childcare free of charge. Parents with young children in the UK spend on average a third of their household income on childcare, compared to just 13% in other countries, according to OECD figures, and 25% of parents in severe poverty in the UK have given up work, and 33% have turned down a job, because of high childcare costs.

However, UK already spends more of its GDP on government support to families than any OECD country except Denmark and France. State-funded childcare in the UK starts at three, or two for lower-income families, but it is limited to 15 hours per week. Some 10% of government support for families goes towards maternity and paternity leave, compared to 17% in Denmark. Around 26% goes on day care, compared to 49% in Denmark. Another big concession is tax credits, which Denmark does not use.

In Denmark, 97% of children aged three to five, and 92% aged one to two are in day care. While around 55% attend centres, the rest are looked after by registered childminders in private homes. Generous parental leave, flexible working hours and the absence of long-hours culture all help families with young children to be able to manage. But childcare is not free. In Denmark, families pay up to 25% of the cost of day care, with those on low incomes or single parents paying less (for the poorest, nothing), with discounts for siblings, and with the government funding the difference.

There is a case for subsidising childcare, if it makes parents able to take a job, rather than depending on state benefits. A paying job is the best welfare programme for families yet devised. But such support should go to the parents who need it, rather than in subsidies for the childcare industry. In our 1995 Pre-Schools for All, we proposed that poorer families would be given vouchers to cover the full cost of a pre-school place, with families on basic and higher-rate taxes receiving proportionately less. "Because the pre-schools provide integrated education and care," wrote our author David Soskin, "access to them would give many parents the choice of going out to work, reducing dependency on benefits." The government heeded this advice, but unfortunately, experiment with childcare vouchers became a bureaucratic nightmare – which it need not have done.

There are of course other possible models. In our 1989 report Mind the Children, we argued that employers should be able to provide childcare facilities or vouchers without employees having to pay extra tax on the benefit. We have also argued that the restrictions on home-based childcare are too onerous, raising the cost to unaffordable levels, and discouraging informal arrangements between parents.

If we are to make childcare available to all, instead of trapping poorer families on benefit dependency, then we need to address the costs of regulation and taxation, and to employ market principles and competition rather than dash towards indiscriminate subsidy or become swamped in bureaucratic red tape. Not an easy task for any government.

The UK's income inequality is regional inequality

We've long said here that inequality in the UK really just isn't quite what we're all told it is. It's not that we have plutocrats in every part of the country, lording it over the surrounding peasantry. No, our high overall inequality numbers are as a result of wages being very much higher in some regions of the country (and the living costs in those parts are higher too, substantially decreasing consumption inequality). And this all works in a manner unlike any of the other european countries, London and it's economic dominance, and higher wages, being quite unlike what happens elsewhere.

Which makes these numbers from the Resolution foundation, funded by the Rowntree folks, so interesting:

Cities in the south of England – such as London, Reading and Milton Keynes – tend to have the highest levels of wage inequality and employment polarisation. The Gini coefficient of wages (a measure of inequality) is 0.337 in London, the most unequal city.

Smaller cities and those that have experienced industrial decline – such as Sunderland and Burnley – tend to have the most equal labour markets. The most equal city, Sunderland, has a Gini coefficient of only 0.237.

The main driver of urban inequality is affluence. Cities with higher average wages and knowledge based economies tend to be more unequal. Cities with weaker local economies generally have lower levels of wage inequality and employment polarisation.

Just to give you a couple of benchmarks, the market wages gini for the UK as a whole is some .45, .46 or so, that of Sweden about the same. The post tax and post benefits numbers for both countries are around .33 and .25.

Even in the most unequal area in the UK the market gini is substantially below the gini for the country as a whole. This is showing us that it is indeed regional differences, not a generally widespread inequality, that is to blame. Further, in the most equal parts of the UK the local inequality is actually less, even at market wages, than the post tax, post benefits, inequality in Sweden.

There really is something substantially different about inequality in the UK. If you look at US inequality then you find that the wage inequality in each State is not that different from the inequality across the country as a whole. It would not surprise me at all to find that being true of much of Europe. But it simply isn't the case here. We really are different: and it's London that makes us so.

Fracking, property rights and compensation

A new Infrastructure and Competitiveness Bill, to be announced to Parliament in the Queen's Speech on Wednesday, will change the UK's trespass law to allow shale gas exploration firms to drill beneath private property without needing the owners' permission.

This move will greatly advance fracking in the UK, where there are large shale gas reserves. It will bring major economic benefits, not to mention increased energy security, at a time when the country's North Sea oil production is tapering off. But there are issues about it, which need to be addressed.

People feel strongly about their property rights, and do not like the idea that people can 'mine' underneath it, even if it is a mile or more underneath it. Others are not over-bothered, but maintain that if people are going to drill under their property, they should be compensated. And some people are concerned about what might go wrong, in terms of the geological stability of their land or the pollution of local water supplies. While research suggests that these latter concerns are almost entirely unfounded, drilling under people's property remains something of concern for them, for a variety of reasons.

The government has tried to address the issue by saying that prospecting firms must make 'community payments' by way of compensation, though critics have complained that the amounts being mooted are rather small. But a more important question is whether such collective payments really meet the public concerns at all. If they simply go into the coffers of local governments, to be spent by local politicians on whatever pet social-engineering scheme they favour, property owners will not regard that as any compensation at all.

If public disquiet is not to hamper the UK's fracking initiatives, compensation should do directly to those whose property is affected. And it must be large enough to convince the majority of them to accept the process. Sending a cheque directly to every home in a village is not such an onerous task. But it is the one thing that would make people accept – and even welcome – fracking under their property, the only practical measure that shows at least some respect for their property rights.

Hedge funds are so over that they're not worth worrying about

We've another of those worrywart articles over in The Guardian. All about how awful hedge funds are, what a bad deal they are and how much power they have. The problem with the situation as laid out is that, as Adam Smith pointed out, the solution is already there in the situation as it is laid out.

Are these sophisticated investors making sophisticated investments? It's hard to find the proof that they are. By many measures – and it is hard to measure – hedge fund returns are pretty much just average. That hedge funds can charge such high fees for such average returns has economists and many others confused. It's not exactly rational. Theories abound.

Smith didn't use quite these words but to condense his usual several thousand of them down to a blog post.

Capitalists like profit: there's also an average rate of profit across an economy (we would add "risk adjusted" to that these days). Given that like of profit everyone's always on the look out for ways of making above that average (risk adjusted) rate. And sometimes people do find them: this can be anything from inventing the smartphone to running the logistics chain of a supermarket better to a new method of investing on the public markets.

Precisely because the capitalists like profit they observe that lucky blighter who has found that better than average (risk adjusted) profit and so they all move some of their capital into copying that activity. At which point that higher than average profit starts to slip away given that there are many more people chasing it.

Or as they might say in the financial markets, no arbitrage opportunity survives the general knowledge of its existence. And as we can say about the economy in general, innovation can lead to economic profits, which then get competed away over time by the competition that comes from copiers.

And we're just fine with this: we consumers get the new products, eventually, at the average profit rate for the economy, those transient economic profits from the innovation being what encouage people to create those new products. This is as true of shiny shiny tech as it is of logisitics chains and financial markets.

Hedge funds are no different. It's definitely true that in their early days, when they were new, they were making economic, above that average, profits. As the complaint itself observed today they're not. They've grown massively in size over that time. Competition has reduced those economic profits to the average of the economy.

Why worry? Everything is working out just as Adam Smith pointed out it would.

Megafund pensions: tax, regulation and competition

On Wednesday in the Queen's Speech before Parliament, UK ministers will herald a move towards a new workplace pension arrangement. The idea is for 'collective defined contribution' pensions, or CDCs, which the government believes could boost pension returns by up to 39%. Such a plan might have hundreds of thousands of members, all of them pooling their regular pension contributions, giving the 'mega-fund' managers far more clout than they have with individual pension arrangements. Denmark and the Netherlands, which already have CDCs, have the lowest levels of pensioner poverty in Europe.

Two things strike me about this proposal.

First, it is a welcome attempt to bring back, in a different form, the highly successful workplace pension plans that the UK used to have before they were taxed and regulated out of existence by former Chancellor of the Exchequer Gordon Brown. Before 1997, huge numbers of employees put part of their salary in workplace pension plans, in return for a defined benefit – normally two-thirds of their final salary. It was a huge success, and the UK private pension sector became larger than that of every other European country put together. But seemingly insignificant changes to 'advance corporation tax' in Brown's 1997 Budget took billions of pounds out of such pension investments each year. Then, much strict solvency regulations – far too strict, in fact, and infinitely stricter than the rules on the government's own, bankrupt, state pension system – led to the closure of plan after plan.

So my first reflection is, if the UK is going to revive this successful idea of workplace pensions, but on a defined-contribution rather than defined-benefit basis, then it needs to armour them against future tax raids and over-regulation.

The second is that there needs to be proper competition between these new mega-funds. Right now, ministers are unclear on that. The pensions minister, Steve Webb MP, has talked about the pensions industry setting up 'the' collective scheme, with the government providing the regulatory framework, and possibly even providing some kind of ultimate guarantee. But while a single collective could provide a great deal of investment clout, it would suffer from the same problems as every monopoly – sloth, bureaucracy, no comparisons on which its success or failure can be measured, leading to bad value for customers.

The right model for CDCs has been around since the early 1990s. Indeed, we reviewed it in the Adam Smith Institute report Singapore Versus Chile back in 1996.It is the Chilean model, now adopted by dozens of countries across the world. In this model, there are many, competing pension funds. Workers may make contributions into whichever they choose, and indeed switch their contributions from one to the other. There is regular reporting, so that contributors can see how their particular fund is reporting. When they retire, their invested savings provide their retirement income.

The popularity of the old workplace defined benefit plans suggests that the new collective defined contribution plans could be highly popular too. But they need to be both competitive and secure from the ravages of future politicians and regulators.

Scotland should have got tax powers years ago

The UK's Conservative Prime Minister David Cameron is expected to offer Scots the power to raise all income tax in Scotland, if they reject independence at the referendum planned for September. This would make the Scottish Parliament responsible for raising 40% of the revenue it spends, and would be offset by and equivalent cut in the block grant that Scotland receives from the Treasury.

This is a change that should have happened years ago. Critics call the present arrangement a 'pocket-money parliament'. Its only debate is how to spend the money gratuitously handed down to it by its English parent.

If Scotland had to raise much of its own revenue, however, the debate would change. The discussion would go beyond how to spend money, and embrace the question of how to raise it. There would, for the first time, be a national discussion about how much Scotland should be spending on its government. Taxpayers, both individuals and businesses, would start raising questions about value for money.

That should be good news for Mr Cameron. At last his Conservative Party, presently sidelined and bereft in Scotland and down to just one Conservative MP in Scotland – would have a real role once again. It would become a home for all those who believe that spending is too high, and who resent paying to fund a profligate government.

Why income inequality is really very good for us indeed

It's much the thing to be talking about these days. How income inequality is rising, wealth inequality is going ballistic and it's all a jolly bad thing. However, let us ponder this point of wisdom from Don Boudreaux:

Would you prefer to live in a society in which people compete for high status by earning lots of money through the creation, production, and sale of better mousetraps, or in a society in which people compete for high status by being indifferent to money but focused intently on conquering foreign territories or accumulating terrifying amounts of political power?

Assume, as we must, that human beings are status seeking animals. Most certainly for the male of the species this has always been true: higher status males have more children which is the point and aim of the entire game. And in various different societies status has been gained in many different ways.

As best we know, from the study of the remnant hunter gatherer groups, for most of our existence status has been gained by being a good hunter: both of prey and of other adult males. Yes, as far as we can tell, in socieities like that of the Yamomani murderers have more children than non-murderers. And in some such societies we've recorded murder as cause of death for as much as 40% of the male population.

We've also assigned status to people in other ways over the millenia of recorded history. Who was your Mum (and presumably there being a connection between that and who was your father) has often been popular. We've never quite done it but plenty of other places (the Fascists and communists come to mind) assigned status according to ideological purity: the Soviets even to the second or third generations. We in Britain have seen religious fanaticism used as a mark of status: difficult to understand the Commonwealth without that. The feudal period nominally ran on bloodlines but in reality on the male skill at crushing the skulls of the enemy.

And class and status have never, in Britian, been entirely about money. Even today they're not. But given the alternative sets of status markers that have been used over the centuries, aristocracy, theocracy, race (useful in discussing the Saxons, Danes and Celts) wouldn't we all start to prefer that they were? That one can gain status by having proven that you are producing something that a lot of others would like to have? For that's what this capitalism lark is at root about. You can only accumulate if you're performing a community service. Which sounds like a pretty good method of assigning social status to us.

Of course, we might always hope that humans will stop seeking status. But then at that point we'd not be describing the actions of the same species that we're currently studying, would we?

If only we could get the public health people to be doing public health...

This is all rather disturbing:

Last week I saw a young woman get off a bus in Lewisham in a singlet that exposed the back of arms completely covered in angry red bed-bug bite marks, like a cartoon version of measles. It's not only Cimex lectularius that has gained new life in England; body and head lice, scabies and other parasites are thriving. More dangerously, London has equivalent multi-drug resistant TB infection rates to those in Asian, South American and Russian Federation areas. In Sheffield Hallam, as the Mail reports today, Roma overcrowding has allowed threadworm, hepatitis and rickets to thrive alongside TB, with children exhibiting signs of malnutrition. Those immigrants - several a day - making it through Calais are also walking infection dumps, infested with scabies and other parasites and diseases.

...

The critical thing is that poor public health affects us all; a solicitor taking the bus because her car is in for a service can pick up head lice, the guy ahead of you on the central line escalator can cough or spit and infect you with TB, and a brush with the M&S fitting room can leave you with scabies. If you live in a big town or city you can't insulate yourself against poor public health - like bees in a hive, there's just too much cross-contact. The only way is draconian public health measures - modern workhouses, disinfestation of public transport, delousing stations, breaking up the slums, compulsory TB testing, school hygiene, fumigation of slum houses and bedding.

What's particularly disturbing about it is that we Brits pretty much invented the entire concept of modern public health. And we have a large number of people who are employed on our behalf to both study it and do something about it. And yet, as Chris Snowden continually reports, they seem to worry more about whether e-cigarettes should be legal, or whether sugar should have a health label on it, than the actual problems of communicable diseases of poverty that are the point and purpose of their trade.

Oh, and there's always the senior professors like this one:

No, really, the man knows not whereof he speaks. Iridium is a brand name for GPS systems, yes it is. But this is because the original design was to have 77 satellites and iridium, the metal, is element 77. There’s no actual iridium, the metal, used in Iridium, the GPS system. We’re getting into real loons on the loose territory here if people are building their desired world governance systems out of such misunderstandings of reality. And don’t forget, this campaign from The Lancet, this Manifesto for Public Health, really is a call for us to change the entire system of planetary government. And it really is based upon the musings of people like Professor Martin McKee. And his elementary misunderstandings of the world in which we live.

I'm well aware of the idea of the long march through the institutions. That the true socialist goals will only be achived when all of the apparatchiki are committed to them even if the electorate is not. But here's the real question: how do we get them to do the job we're paying them to do in the meanwhile as we wait for that nirvana?

Another point that occurs: if these geniuses in the public health movement can't get scabies out of a rich population like that of the UK then why should we take their ideas on planetary governance seriously? It's not like they're showing any great competence in their core task, is it?

The latest barkingly mad idea about house prices

David Boyle is, as we know, associated with the new economics foundation. It is therefore obvious that his ideas about matters economic are going to be less than sensible. He's approaching a real problem here of course:

David Boyle, who is also a fellow of the New Economics Foundation think-tank, said home ownership will be beyond the means of many of today’s children, leaving them at the mercy of rising rents. He predicted that by 2045, the average house price will reach £1.2million, meaning only the very rich will be able to afford a property.

I suppose that it's possible that that could happen, yes. So, what's his solution?

Instead, he said a radical solution is needed whereby new homes are sold at their initial price for 100 years.

And so is the nef's reputation for economic lunacy left entirely unsullied.

For prices are information. Rising house prices are the information that it would be a good idea to go build some more houses. And if we freeze house prices then we don't get that information about whether we might or should go build more. And if we don't have the information about possible shortages then such shortages, if they occur, will just get worse, won't they?

A rather more sensible response to rising house prices might be to issue more of those little chittys that allow you to build on a particular p[iece of land. Housing permits they are sometimes called. For we have no shortage of land that could be built upon, only a shortage of those chittys allowing the housing to be built. In fact, we're not even seeing rising house prices. We're really seeing a rise in the scarcity value of the chittys. Which, since they're created at the stroke of a bureaucrat's pen would seem to be a fairly easy thing to make more of.

And yes, nef still stands for not economics frankly.

The eurozone is in dire need of nominal income targeting

It may well be that, in the US and UK, nominal GDP is growing in line with long-term market expectations.* It may well be that, though we will not bring aggregate demand back to its pre-recession trend, most of the big costs of this policy have been paid. And so it may be that my pet policy: nominal income/GDP targeting, is only a small improvement over the current framework here in the UK or in the US. But there is one place that direly needs my medicine. As a whole, the Eurozone is currently seeing very low inflation, but plenty of periphery countries are already suffering from deflation. And this is not the Good Deflation of productivity improvements (can be identified because it comes at the same time as real output growth) but the Bad Deflation of demand dislocation. The European Central Bank could deal with a lot of these problems simply by adopting a nominal GDP target.

When it comes to macroeconomics, the best analysis we really have is complicated econometric models on the one side, and highly stylised theoretical models on the other. Both are useful, and both can tell us something, but they rely on suspending quite a substantial amount of disbelief and making a lot of simplifying assumptions. You lose a lot of people on the way to a detailed theoretical argument, while the empirical evidence we have is really insufficient to conclusively answer the sort of questions I'm posing.

In general, I think that very complex models help us make sense of detailed specifics, but that "workhorse" basic theoretical models can essentially tell us what's going on here. Unemployment is a real variable, not one directly controlled by a central bank, and a bad thing for the central bank to target. But in the absence of major changes in exogenous productivity, labour regulation, cultural norms around labour, migration and so on, there is a pretty strong relationship between aggregate demand and unemployment. Demand dislocation is almost always the reason for short-run employment fluctuations.

Unemployment rose everywhere in 2008-9. But it nudged down only marginally post-crisis in the Eurozone, whereas in the UK and US it soon began to steadily fall toward its pre-crisis rate (the red line, though not on this graph, has tracked the green one very closely). In the meantime the Eurozone rate has risen up to 12%. This is not at all surprising, given the almost complete flattening off of aggregate demand in the Eurozone—this means a constantly-widening gap with the pre-recession trend (something like 20% below it now).

Although intuitively we'd expect expectations to steadily adjust to the new likely schedule, three factors mean this takes a while: firstly the ECB is very unclear about what it is going to do (and perhaps unsure itself), secondly some plans are set over long horizons, and thirdly the lacklustre central-bank response to the 2007-8 financial crisis is unprecedented in the post-war period.

1. We have a huge literature on the costs of policy uncertainty—the variance of expected outcomes has an effect on firms' willingness to hire, invest, produce, independent of the mean expected outcome.

2. Many firms invest over long horizons. It may have become clear at some point in 2011, when the ECB raised interest rates despite the ongoing stagnation and weak recovery, that the macro planners, in their wisdom, were aiming for a lower overall growth path and perhaps a lower overall growth rate in nominal variables. And so, after 2011 firm plans started to adjust to this new reality. But many plans will have been predicated on an entirely different 2009, 2010, 2011, 2012, 2013, 2014, and so on. And as mentioned before, the gulf between what was expected for the mid-2010s back in 2007 and what actually happened is actually widening.

3. Thirdly, and finally, the period 2008-2010 is unprecedented and will have slowed down firm adjustment substantially. As mentioned above, even if firms set plans with a fairly short-term horizon (a few years) they wouldn't have been able to adjust to the new normal in 2008, 2009 and 2010 unless they really expected the ECB's policy of not only not returning to trend level, but not even return to trend rate!

All of these three issues are convincingly resolved by nominal income targeting. It's very certain—indeed the best version would have some sort of very-hard-to-stop computer doing it. It promises to keep up to trend. And it is very stable over long horizons.

Recent evidence reinforces the view, implicit in our models, that (unconventional) monetary policy is highly effective at the zero lower bound, even through the real interest rate channel (!) All the ECB needs to do is announce a nominal income target.

*This reminds me: isn't it about time we had an NGDP futures market so we could make claims here with any kind of confidence?