Rolling down a slippery slope

Warnings about ‘slippery slopes’ are often overused by defenders of individual liberty. That’s probably inevitable, since we often end up defending a principle against a seemingly-pragmatic policy that, by itself, is not very objectionable.

For instance, I find it hard to muster any specific argument against energy efficiency labelling of washing machines, but the principle of letting people do what they want with their own stuff means that I’m still pretty suspicious of them. It’s hard to convince someone else who doesn’t already share my belief in that principle without resorting to things like slippery slope arguments .(First they label the washing machines – next it’ll be health warnings on cans of Coca-Cola!)

But, overused as they can be, slippery slopes really do exist. Tobacco regulation is an interesting example, because it's often used as the thin end of the wedge for other kinds of paternalism. After plain packaging of tobacco was passed in Australia (will the new, nominally Liberal government repeal this legislation?), its advocates moved straight on to calls for plain packaging of alcohol. To quote our 2012 paper:

Australian Senator Cory Bernadi recalls: “[O]n the very first day [after the plain packaging legislation was passed] they moved onto drinking. People who were advocating plain packaging were saying “We should have this for alcohol. We should have it in fast food”. Where does it end? The nanny state will never end because there is always another cause to advocate for.”

Some health groups in Australia have also called for plain packaging of ‘junk food’, whatever that is.

So it’s worrying when tobacco is treated as a special case in international trade agreements, as is happening in Trans-Pacific Partnership negotiations between a number of major Pacific Rim countries, including Australia, the US, New Zealand and Japan.

The US and Malaysia have proposed exemptions for domestic tobacco control measures from the provisions of the Partnership. Not many people will object to that on its own, but here’s where the slippery slope problem comes in. Most free trade agreements are riddled with special exceptions, but using them to reinforce domestic paternalism is particularly ugly.

A free trade agreement that institutionalises tobacco as being ‘non-normal’ is a hop, skip and a jump from one that does the same for all sorts of other things that people probably would have a problem with being told are abnormal, like booze. And the infantilization of adults – much harder to pinpoint than the number of lives supposedly ‘saved’ by tobacco control measures – rolls on.

What an interesting example from Zoe Williams

If this were true it would most certainly be undesirable:

We spend so much time talking about this titanic clash between the free market and the social state – yet ignore the fact that most of our major "markets" no longer operate as such. This is an oligarchy whose only governing authority is the administrator of wrist-slaps, and whose principles begin and end with the preservation of its jointly and severally managed profit. Which is to say that they're not competing against each other; they collaborate brilliantly – which would be sweet to watch were it not for the fact that they are working together the better to screw us.

Monopolies and oiligopolies are indeed undesirable things. And we here at the ASI spend much of our time pointing this out and arguing for the one known solution to the problem, more markets, more free markets. But what really surprises is the example that Ms. Williams uses to bolster her case:

Looking specifically at PPI, we could also see the counter-intuitive but obvious point that banks aren't charging enough for their services: current accounts cost money to administer. But rather than admit this, they would prefer to outwardly compete with one another, vie to see who can be the most free, while recouping the money by sleight of hand (swingeing overdraft charges), irresponsible lending or outright cheating (mis-sold PPI). This is what a market with only four or five big players looks like: amazing value in the top line, all the profit draining from somewhere you can't see.

In a truly competitive market we expect profits to decline to something around zero. In the long term perhaps to the level that just covers the cost of capital: something the UK commercial banks do not manage. In the proper economic sense they are therefore losing money: just the result we expect from that truly competitive market.

So, in the provision of current accounts we have evidence that we do indeed have that desired competitive market. Yet this is being taken as evidence of oligopoly? What is it they're putting in the water over there in York Way?

The new economics foundation hasn't bothered to understand Adam Smith

You would think that 237 years after publication that those who wish to pronounce on matters economic would have, by now, grasped the simple and basic points that were made by Adam Smith in Wealth of Nations. But apparently not, at least not over at the nef, which is why Giles Wilkes explanation of the acronym, not economics, frankly, is so apposite.

They've a new book out telling us how lovely it would be if we all just worked less and had more leisure. In this they are correct: it would indeed be wondrous if we were able to take more of our increasing wealth as leisure. Which is, of course, what we have been doing for some centuries now as our wealth has increased. We all have a great deal more leisure time than our forefathers (and most especially foremothers), as I've pointed out here and elsewhere many a time.

However, where the wheels come off the organic yurt is that they think that we will increase leisure hours by doing less work in the market and more for ourselves in domestic production. This is, quite frankly, an insane suggestion.

Take two of Adam's points. The first that the sole purpose of all production is consumption. The corollary of this is that we would like production to be efficient: this will maximise potential consumption for any given set of inputs. The second that the division and specialisation of labour increases the efficiency of production. Thus, if we wish to increase the amount that can be consumed for the inputs available then therefore we want to take advantage of the specialisation and division of labour.

The specialisation and division of labour takes place through the market: sadly it's not true that all 7 billion extant human beings are part of this yet (this is why some of them are so darn poor) but a good three to four billion are. That's the number that we can divide and specialise with. This is going to, does lead to, vastly greater efficiency of production than the available split between the two people in my household. Thus by doing more market work and less household production I will maximise the amount of leisure I have for any particular standard of living. Or, if I wish to run it the other way (as we all do at times, some of us do all the time) maximise the standard of living for the number of hours I am prepared to labour and not be at leisure.

The entire thrust of the nef's new little book is that we should, in complete contradiction to the above description of reality, do less market work where we are efficient and more household work where we are less so. So that we must labour more hours for any particular standard of living or, alternatively, have a lower standard of living for any particular amount of leisure we might decide to have.

In one chapter we have a full blown professor no less arguing the following:

Tim Jackson challenges the argument that more labour productivity inevitably leads to more growth and more jobs.

No one has ever said it does: rather, that greater labour productivity allows more leisure for that labour that is being more productive: or, alternatively, a higher standard of living for said labour.

These people a loons.

Mean medians

The US Census Bureau has just released a major publication "Income, Poverty and Health Insurance Coverage in the United States: 2012" that has set much of the US political and economic blogosphere alight. "The incomes of the middle class have stagnated!" they cry, pointing to a statistic that shows the median household income in 2012 down from a real terms peak of $56,080 in 1999 to its pre-recession peak of $55,628 in 2007, to a measly $51,017 last year. That means the median has grown just 3% since 1991, when the last major recession hit the bottom. On the headline measure, incomes are actually below 1989.

I do not doubt that the middle classes (and the poor!) have been hit hard by the recession (although in the UK the story might not work in exactly the same way). But to tell this as a general story of middle-class decline seems to be stretching it massively. I don't just mean because we can now use excellent services like Facebook, Twitter, Google, and so on for free. Having said that, I think Tyler Cowen massively undercounts the importance of free internet services—we now have near-instant, cheap or free access to basically the entirety of human artistic output. A proper measure of consumption or income that included these would give a much more optimistic result.

Still, this isn't my key point. We use median statistics because incomes are very unequally distributed—the US had a Gini coefficient of 0.463 in 2012, while the UK's was 0.32 in 2011-12. A mean (like GDP/capita) does not tell us anything about how gains are distributed, it just tells us how big the gains have been, compared to the size of the population. A median, showing us the middle point, is less easily skewed. But a median can still be extremely misleading under certain circumstances.

One of those circumstances, and an empirically highly relevant one, is when there is mass immigration to a country. According to one official dataset and my simple calculations, legal inward migration to the US was 13m between the 1999 peak and 2011 (inclusive). Presumably illegal migrants aren't counted in the figures, but for completeness we might note they seem to number more than 12m. If we assume that inward migration is typically lower skilled than the US population as a whole (which seems highly plausible), then it's entirely possible that a median falls while every individual in the population becomes much richer. Indeed, this is particularly true if outward migration is largely made of particularly high-skilled people (which also seems plausible). The income per natural concept, developed for a different reason, but relevant, is the number we'd want to check to look at the real trends in incomes when the make-up of the population is changing significantly.

Immigrants to the USA have much higher incomes than they had before. US citizens' incomes also rise, not just because migration boosts their wages but also because of the general effects of economic growth—GDP/capita is significantly up on 1989, 1991 or any of dates picked to generate shocking income statistics. Everyone is better off, but the statistics need not reflect that. Of course, since I haven't picked the statistics apart absolutely conclusively, I can't say for sure that this effect is actually driving the divergence between apparent prosperity for US middle classes and the statistics implying penury. But of course, without that level of digging, neither can the het up US wonks.

Free school meals aren't as tasty as they sound

All children at infant schools will be given free school meals from 2014, Nick Clegg has announced, at a cost to the taxpayer of £600m.

On the face of it, the policy is extremely bad. Children of parents earning less than £16,190 and/or receiving income support or other kinds of welfare are already entitled to free school meals, so, other than children whose parents are unaware that they are eligible, the main beneficiaries of this policy will be the children of middle-income families.

That’s the wrong kind of redistribution. There is a decent case for helping the children of poor families who simply cannot afford to give their kids a decent packed lunch, but extending that to all children requires pretty big (and probably wrong) assumptions about parental fecklessness and state effectiveness.

But there is a complication. Trials that tested universal free school meals in schools across three local authorities between 2009 and 2011 found that extending meals to some students didn’t do much, but making them universal correlated with 1.9% and 4% improvements in literacy at Key Stages 1 and 2 respectively and 2.2% and 5.5% improvements in maths at Key Stages 1 and 2. (pp 143-144)

If those numbers really were caused by making free school meals universally available (and they were more cost-effective than alternative ways of spending that money), there would seem to be a strong case for the policy. However, the authors of the government’s impact report point out that, basically, they don’t understand why this relationship exists. Neither attendance nor behaviour were affected, so they assume that free school meals led to greater classroom ‘productivity’.

What if they’re missing something and the free school meals aren’t the causal factor? Or what if nationwide implementation has bad unintended consequences we can’t foresee?

That’s exactly what happened when California rolled out a state-wide class-size reduction programme, an example given by Nancy Cartwright. Despite doing well in randomized controlled trials in Tennessee, in California the programme had no real effect on outcomes. The sudden need for lots of new teachers meant that more bad teachers were hired; and not all of the factors that made smaller classes helpful in Tennessee were present in California. Evidence isn’t always as transferrable as we’d like it to be.

That’s not really a good reason to think the policy will fail, but it should temper our enthusiasm for rolling it out nationwide. What works in Wolverhampton might not work in West Sussex. Indeed, what works in a particular school in Durham might not work in another school across the county. In some schools, universal free school meals might be just what the doctor ordered. In others, headmasters might think that fixing their school’s dodgy central heating would be a much better use of the money.

Ultimately, it boils down to the principle we go on about again and again here at the ASI: devolving choice down to the most basic units possible. The available evidence does suggest that “universal free school meals” are a good policy, but that evidence is quite limited. The complexity of these things means that rolling it out nationwide might not achieve what we’d hope.

Better to give schools the money and the information and let them decide what to do with it. That way, instead of basing a national policy on the results of a few randomized controlled trials, the process of experimentation and discovery can be ongoing across the country.

Heavens to Betsy, Robert Reich almost gets one right

Unfortunately Robert Reich is not a perfect guide on what not to do as he sometimes almost manages to get things right:

These rules don’t exist in nature; they are human creations. Governments don’t “intrude” on free markets; governments organize and maintain them. Markets aren’t “free” of rules; the rules define them. The interesting question is what the rules should seek to achieve. They can be designed to maximize efficiency (given the current distribution of resources), or growth (depending on what we’re willing to sacrifice to obtain that growth), or fairness (depending on our ideas about a decent society). Or some combination of all three — which aren’t necessarily in competition with one another.

Markets do indeed exist in nature: the male bower bird building a shelter in return for a legover is and exchange in a competitive market whatever else it might be as well. But yes, it is true that the rules define the markets and we can indeed play with the rules to push one or more of those ends. But it's not quite any mixture will do:

Evidence suggests, for example, that if prosperity were more widely shared, we’d have faster growth.

Not really, no. For it would depend upon how we made that properity more widely shared. Higher taxes and more redistribution could well have higher deadweight costs than whatever greater growth more widely shared prosperity might putatively provide us.

But then of course Reich goes so horribly wrong:

Instead, the rules are being made mainly by those with the power and resources to buy the politicians, regulatory heads, and even the courts (and the lawyers who appear before them). As income and wealth have concentrated at the top, so has political clout. And the most important clout is determining the rules of the game. Not incidentally, these are the same people who want you and most others to believe in the fiction of an immutable “free market.” If we want to reduce the savage inequalities and insecurities that are now undermining our economy and democracy, we shouldn’t be deterred by the myth of the “free market.”

Those things described, the buying of influence at the political court, are not free market. Indeed, the solution to those things is to have a free market: one not influenced by politics and thus one in wihch purchasing politicians gains one no advantages. That is, Reich is reliably wrong again in the actions he calls for, for free marketry is the solution for exactly what he is complaining about.

Bleeding heart libertarianism and British politics

I have a chapter in a new publication by Liberal Reform, the classical liberal movement within the Lib Dems, in which I make the case that non-libertarians and libertarians may find a surprising amount of common ground if they put their differences of opinion about wealth and income redistribution aside. (Unfortunately, you have to sign up to Liberal Reform's mailing list to read that piece. You use my email address to login instead: sam at adamsmith dot org)

Basically, the chapter is an attempt to sketch out a British political economy of Bleeding Heart Libertarianism, the movement that has sprung up around American philosophers like Matt Zwolinski. The main areas I identify are immigration reform, drugs legalization and 'modern mercantilism' (a broad term for corporate and middle-class welfare).

I do think there's a lot of common ground between libertarians and people on the left, but for a serious dialogue to work I propose that libertarians shift their focus from opposition to wealth and income redistribution to a single-minded focus on the regulatory apparatus of the state:

I suggest that libertarians concerned with the plight of the poor should abandon their opposition to wealth redistribution in practice and focus instead on the regulatory state, where we have a much greater degree of certainty about the harm caused. For libertarians who wonder if they are BHLs, the question might be: If libertarian institutions existed and serious, significant poverty persisted, would state action be justified in acting to relieve at least some of that suffering, if we had a pretty good reason for thinking that that action would work?

I think that it would, and if you have a serious commitment to welfare so should you. The only problem should be an empirical one, which I cannot say is strong enough to reject all wealth redistribution. While I am extremely confident about the benefits of liberalising planning to allow new homes to be constructed in the UK, I feel less confident about saying that all redistribution is harmful.

So I propose a compromise: a ‘libertarian welfarism’. This might see us reform tax credits and the welfare system into a combination of universal basic income and a ’negative income tax’ that acts as a top-up to people’s wages, adjusted to give a little more to people in low-income jobs and the unemployed. The details of this approach to income redistribution are not important for now: what matters is the idea of a simple, cash-based redistributive mechanism. I find myself very comfortable with this kind of redistribution; other libertarians will be less so. But perhaps they could accept it as the cost they have to pay to persuade others about the other, much more important, things they have to say.

I expect many people to find this kind of thinking quite outrageous, but to me the really strong arguments for libertarianism are based on our beliefs about ignorance and incentives, not justice, so they should only preclude redistribution of wealth as a matter of pragmatism. There's no intrinsic reason you can't combine those ideas with "left-wing" beliefs about what a good world looks like any less than they can be combined with "right-wing" beliefs about the kind of world we watnt. I don't know if libertarians will ever be able to have the same influence on the left that we've had on the right, but it's worth a try.

Chart of the week: US balance sheets contract

Summary: US banks’ falling holdings of risk assets could mean trouble

What the chart shows: The chart shows US commercial banks’ holdings of Treasury and Agency securities

Why is the chart important: Two common themes in the aftermath of the Great Recession have been politicians attempting to make banks safer by mandating higher capital ratios; and also attempting to make banks lend more. These are generally mutually contradictory. Current US developments are a case in point. US banks have in the past stocked up on ‘safe’ assets in the form of Treasury and Agency bonds. But, recently, their bond holdings have shrunk, partly because of higher interest rates, which push down the value of bonds. At the same time, banks have been discouraged from buying ‘risk’ assets. Instead, the Fed’s QE enabled banks to pile into cash. But now the Fed is poised to turn off the cash tap. This could threaten current healthy broad money growth; and potentially derail the US recovery.

Why would shares go up in value when someone's trying to sell them?

Answer: because the sale might allow someone to rebuild a cartel.

Part of the story is here but I'll give you the simple version. Potash is one of those minerals vital to civilisation: it's a major ingredient in fertilisers. It's also cheap ($300 a tonne or a little more) and has very large capital costs in its production. Hundreds of million to billions to get a mine going. Marginal costs of production are near trivial.

So, it's a prime candidate for the cartelisation of the industry. Anyone looks like opening a new mine the current incumbents will gently remind them that they'll have all that capital at risk for years while everyone else can drop to marginal production prices and bankrupt them. This barrier to entry through collusion then keeps prices high for those incumbents.

And this is indeed what has been happening. The Belarussian and the Russian producers, between them some 40% of the world market, have been deliberately restricting their output in order to gain higher prices: monopoly pricing in effect, or at least partial monopoly pricing (when prices are at that sort of $300 a tonne for something then transport costs become very important. So local monopolies are certainly possible).

Then, because such cartels are always fragile to the possibility of defection, The Russians accuse the Belarussians of selling some stuff on the side and then they decide to break the cartel themselves. The price of potash falls on world markets.  At which point the Belarussians arrest the CEO, the Russians decide to truly give up and sell their stock in the Russian producer.

At which point the shares in that Russian producer rise: just as someone's looking to offload them. Eh? And the global potash prices rises too? Yes, because the Russians selling out could be a prelude to a re-establishment of the cartel.

Which is, I thjink, an interesting little example of the extra profits that can be made by cartels/monopolies. And since those extra profits must come out of the pockets of consumers, why we don't want to allow people to generate cartels and or monopolies. But apparently they do things differently over in Russia and Belarus.

Banning the burqa would be illiberal and un-British

The tabling of Philip Hollobone MP’s Face Coverings (Prohibition) bill — which aims to ban the burqa in public places — has reginited the debate surrounding this controversial issue. Commenting on similar bans in Belgium and France, Thomas Hammarberg (the Council of Europe's commissioner for human rights) has described such legislation as “capitulation to the prejudices of xenophobes”. It is indeed arguable that the burqa issue has been used as an ideological weapon with which to criticise immigration and associated issues.

It's worth examining the tangible consequences of such a ban in other countries, rather than the motivations behind those who advocate it here. In the case of France, banning the burqa was followed by a wave of verbal and violent attacks on Muslims: some estimates suggest that physical attacks on women wearing the niqab increased by as much as 34% after the introduction of the ban. Such vehement hatred of Muslim custom doesn’t seem to be as prevalent in the UK, but state-sanctioned discrimination would likely encourage similar hate crimes. Tensions in France spilled over on the Muslim side too, with riots in Trappes earlier this year sparked by a scuffle concerning the removal of a face veil.

Proponents of the ban say that gender equality is the goal of such legislation. Yet, by banning the burqa, women pressured into wearing full-face veils by their religious leaders or husbands will be placed under virtual house arrest, whilst those who actively want to wear them in everyday life will be prevented from doing so. This is hardly in keeping with British values of individual liberty and tolerance, as Mohammed Shafiq, chief executive of the Ramadhan Foundation has said: “We take great pride in the United Kingdom's values of individual freedom and freedom of religion and any attempt by illiberal male politicians to dictate to Muslim women what they should wear will be challenged."

The truly liberal approach is the moderate one, taking both property rights and individual choices into account. One section of the Face Coverings (Prohibition) bill goes some way to acknowledging this sentiment:

"…where members of the public are licensed to access private premises for the purposes of the giving or receiving of goods or services, it shall not be an offence for the owner...to request that a person wearing a garment or other object intended to obscure the face remove such garment or object; or to require that a person refusing a request...leave the premises."

If the ‘burqa ban’ were simply the above recognition of the rights of property owners to exercise their own discretion – undeniably beneficial in the case of banks and airports – then it would not be a problem. But to use the blunt instrument of a universal public ban would be fundamentally illiberal, and profoundly un-British.