23 Things We're Telling You About Capitalism X

The tenth thing we have to understand is that actually Americans aren't as rich as all that. This is very important because if that sort of free market capitalist society did lead to the richest society on Earth then of course all the other strictures about how awful free market capitalism is would be rather wasted. We'd start to believe our own lyin' eyes rather than the Reader in Economics at Camdridge and that would just never do.

The rest of the chapter is just hemming and hawing about how we should change the figures to show that actually Americans are not the richest society on the planet. Well, OK, even I'm not going to claim that there aren't certain microstates that beat the US: Luxembourg for example. But comparing a few hundred thousand people to 300 million seems rather like cheating. It would be like comparing Manhattan to Texas for example, just not quite fair. Or, again about the same distortion of scale, comparing the residents of Eaton Square to the entirety of Luxembourg.

Chang has two basic methods in use here to show that the American Dream is just that, a wraith. After we go through all the various ways that we can measure income he agrees that Purchasing Power Parity is the right one. Which is good, for it is. We don't measure just incomes, but incomes as compared to prices in the places the people are living. This gives us a much better idea of living standards. And by PPP measurements, absent those microstates, the US is indeed the winner. To which Chang says but hang about a bit.

Firstly, we know that the US is a more unequal society than many others. Thus the average doesn't give us a true view of how people really live. In an unequal society there will be more people below that (mean) average and thus the real average (ie median) living standard is lower than in a more equal society. Which could even be true but it's not all that large an influence. After we account for all of the taxes and benefits then everyone from Sweden to the US is in a gini (the way we measure inequalty) range of 0.25 to 0.38 or so. And the scale does run from 0.01 to 1.00.

More importantly perhaps we do have some evidence of what actual living standards are at the bottom of the pile in a number of different societies. This chart:

These are the incomes at PPP (so adjusting for price differences) after taxes and benefits. And the comparison is to US median income: so, the bottom 10% in Sweden get 38% of US median income. The bottom 10% in Finland get 38% of US median income. And the bottom 10% in the US get 39% of median income.

Hmm, I think our contention that the US higher average income isn't really valid because the poor get less than the average....thus the greater inequality means that the lives of the poor in the US are worse off than the poor in other countries....doesn't really stand, does it?

The US is definitely a more unequal country. But the poor seem to be about as well (or badly) off as the poor elsewhere.

The other trump that Chang plays is to point out that Americans have longer working hours than people in most other countries. Given that slaving away over a hot desk isn't what life is all about then perhaps we shouldn't all attempt to emulate this US lifestyle then? And while it's true that money isn't everything and that very few of us go into that long dark night bemoaning the paucity of hours we spent working for The Man, Chang has committed a terrible error here. He has assumed that the only form of work we do is paid working hours.

The actual division made is between personal time (we cannot get someone else to sleep for us, take our shower for us), paid working time, household production time and the balance left over is leisure time. The important point to note here is that there is that unpaid working time: that time spent in household production. We might think of digging the allotment to feed the family, childcare time, cooking time, washing and cleaning, repairing the car. It is this time plus paid working time for The Man which produces total working time. And when we look at this total working hours it isn't obviously true that Americans do work more hours than, say, Europeans. It is also possible to substitute household production for paid working time and vice versa. Once can slave over the hot desk to buy a takeaway, or slave over a hot stove to make up for the lack of income from the time not spent at the desk.

In fact, when people actually study exaclty this question (ie, here) they find that the opposite is true, Americans don't work longer hours. For example, the average German woman is working an hour and a half a week more than her US equivalent. And for the men the working hours are almost exactly the same. The German woman might be making sauerkraut at home (I know, terribly culturalist of me) while her American sister goes out to work, earns the money and they buys it: in the process the American sister gaining more leisure time than the German.

It is indeed true, as Chang states, that Americans do more paid working hours per year than Europeans. It is also true that the US is a more unequal society than most of Europe (Italy is actually more so than the US). However, the American poor have incomes around and about the same as the European poor. Americans work fewer unpaid, household production, hours leading to equal or greater leisure time. And as Chang has already admitted, the Americans do indeed, on average have both higher incomes and greater command over consumption opportunities as a result of those higher incomes.

The poor get about the same: the regular guy is both richer and has equal or greater leisure time? Perhaps there is something to say for this free market capitalism stuff they have in the US then?

Footnote. For those who think we shouldn't be talking about household production, please read the Stiglitz Report. The entire issue is well explained there.

Think Piece: Busting welfare myths

The welfare debate has roused emotions on both the left and right, and has led to some outlandish claims. Myth needs to be separated from reality. Here is my take on what we should and shouldn’t believe.

Myth: Welfare spending that goes on pensions is unreformable.

Reality: The state pension eligibility age has risen too slowly.

Opponents of cuts to welfare often cite the proportion of welfare that goes on pensions (48% or a total of £80bn) as proof that the colossal budget is justified. This is lazy reasoning. The problem is not that pensioners necessarily receive too much money per year, it is that they receive it too soon. Life expectancy is rising fast and people are able to contribute to the economy for longer than they used to. If the government were to raise the state pension age over the next two decades to 70 taxpayers would save hundreds of billions and all would benefit from the contribution of older workers. If this change were made by 2030 pensions would still provide for 15 years of retirement, based on experts' guesses of life expectancy then. Historically this change is long overdue – since 1948 life expectancy has risen by 16% but the accompanying rise in the State Pension age has been a meagre 1% for men and 3% for women.

Continue reading.

Ten reasons why the Left should like the ASI, 10: Jobs

The Left should back the ASI's proposals to increase the numbers of jobs available, especially for those of relatively modest skills.

The ASI takes the view that the best welfare measure of all is paid employment.  Someone in a job that pays wages or a salary can meet their needs and advance their status far better than anyone dependent only on state support.  The ASI supports measures than can boost job-creation by making it easier and cheaper to employ people.  It is made easier by reducing the paperwork and regulatory compliance required of would-be employers, and it is made cheaper by reducing the tax burden that falls on them.

Since about two-thirds of new jobs are created by small employers, the ASI has concentrated on the small business sector, proposing a lighter regulatory environment for them than for business in general.  The large firm can afford the costs of compliance more readily than can the small or start-up business.  One of the ASI proposals is that small firms should be allowed to treat their workers as self-employed, removing the need for employers to calculate and handle PAYE and NI payments, as well as reducing the non-wage provision they are obliged to provide for employees.  This would greatly boost the number of jobs, and be particularly effective at encouraging the one-person business to overcome the barriers that discourage it from taking on its first employee.

Although part of the Left wants to concentrate on securing more rights for those already in jobs, the rest of them should support ASI proposals that could greatly increase the jobs available and therefore the employment opportunities for those seeking jobs, especially young people.  They should also note that it is today's start-ups that will secure jobs in Britain's future, and support the ASI's commitment to an expanding future for employment.

Busting welfare myths

The welfare debate has roused emotions on both the left and right, and has led to some outlandish claims. Myth needs to be separated from reality. Geoffrey Taunton-Collins gives his take on what we should and shouldn’t believe.

Myth: Welfare spending that goes on pensions is unreformable.

Reality: The state pension eligibility age has risen too slowly.

Opponents of cuts to welfare often cite the proportion of welfare that goes on pensions (48% or a total of £80bn) as proof that the colossal budget is justified. This is lazy reasoning. The problem is not that pensioners necessarily receive too much money per year, it is that they receive it too soon. Life expectancy is rising fast and people are able to contribute to the economy for longer than they used to. If the government were to raise the state pension age over the next two decades to 70 taxpayers would save hundreds of billions and all would benefit from the contribution of older workers. If this change were made by 2030 pensions would still provide for 15 years of retirement, based on experts' guesses of life expectancy then. Historically this change is long overdue – since 1948 life expectancy has risen by 16% but the accompanying rise in the State Pension age has been a meagre 1% for men and 3% for women.

Myth: capping housing benefits is a long term solution

Reality: the housing crisis will only be solved by increasing supply

The next biggest outlay after pensions is housing benefit. This takes up 11% (£20bn) of the welfare budget. The government has made some savings by putting a cap on welfare at £26,000 (if a household’s benefits are in excess of this figure housing benefit is reduced until they fall into line). A more fundamental solution would be a liberalisation of planning laws to allow development in areas where it is currently blocked. The strangling of supply is the cause of relentless house price and rent inflation. If development rights were auctioned off and the proceeds given to local residents this would alleviate both the problem of NIMBYism and the government’s bloated housing benefit bill. It would also have the corollary benefit of helping young people onto the housing ladder, and would preserve the vast majority of our rural spaces.

Myth: The government’s ‘making work pay’ initiative is merely a cover for cuts.

Reality: Some in-work benefits will have to rise if work is ‘to pay’.

The benefits system is riddled with financial disincentives to move into work. The government is trying to eliminate them so that welfare prevents poverty not job-taking. What is rarely acknowledged is that eliminating disincentives sometimes implies increasing benefits. Notably, those entering work often face aggressive withdrawal rates (Job Seekers’ Allowance and Income Support have 100% withdrawal rates) and if work is to pay these sudden withdrawals will need to be smoothed out. The gist of the Universal Credit is to have fewer people receiving out of work benefits in the long run, but not necessarily to give those on welfare less money. We should therefore be weary of clichéd claims that the Universal Credit is a veil for welfare cuts.

Myth: Immigrants sponge off welfare

Reality: Benefits tourism is miniscule

Immigrants are 60% less likely than natives to receive state benefits or tax credits and only 6.4% of total working age benefits go to immigrants. Further, immigrants from the ‘A8’ (the Eastern European countries entering the EU in 2004) pay 37% more in taxes than they receive in public goods and services. Of course, this tells us nothing about the social impact of the 3 million new people (between 1997-2010) who have moved to Britain, and tried to assimilate into British culture. It does confirm, however, that scare-mongering about benefits tourism is unfounded.

Myth: benefit fraud is rife/ benefit fraud is negligible

Reality: We have no idea how common benefit fraud is

The simple fact is that there are no reliable figures on benefit fraud (and so we have no idea if the public overestimates it incidence). The most commonly used figure comes from a 2011/12 report from the DWP which estimates that 0.7% of expenditure goes on fraudulent claims. But benefit fraud amounts to fooling the DWP into thinking you are entitled to more than you actually are, so to suppose the DWP’s figures are accurate is to suppose that British benefit fraudsters aren’t very successful – which is to beg the question. Polls show that Brits think 27% of the welfare budget goes on fraud, in the absence of more reliable figures we cannot endorse or deny this estimate.

Myth: the public think that 41% of welfare goes on job seekers’ allowance

Reality: they think that 41% goes on benefits for the unemployed

It has become common in some circles to consider the British public misinformed about job seekers’ allowance spending. Brits are accused of being wildly off the mark since only 3% of the welfare budget actually goes on this benefit. This is unfair – the 41% figure comes from a TUC poll which asks how much is spent on ‘benefits for the unemployed’. Unemployed people can receive housing benefit, child benefit, free school meals, tax credits and so on – in other words they receive far more in benefits than just job seekers’ allowance.

The AA and manipulation of the petrol price

On Friday the AA hit the newspapers with the allegation that there are shadowy companies in the petrol market. Speculators even: they buy up petrol, sit on it until the price rises and then, horrors, make a profit!

Few of the traders’ names – including Glencore, Cargill, Gunvor and Trafigura – are known to consumers outside the oil industry, but their effect on Britain’s 33million motorists and the wider economy is profound. They buy huge quantities of petroleum on the open market and store it until the price goes high enough to make them a handsome profit, at which point they sell.

It's an interesting contention, isn't it? That future prices are well enough known that you can make sure and certain profits just by storing something for a little bit. I'm particularly suspicious of the allegation in that at least some of those companies are wholesalers of petrol: the people who buy the tanker loads that the oil majors like to sell and split it up into the truck loads that petrol stations like to buy. And yes, there are more such companies these days as the oil majors pull back from their downstream activities.

The allegation then goes on that consumers are losing out as a result of the actions of these companies. Something which is by no means certain as, yes, it's Adam Smith time at the ASI once again, points out in WoN, Book IV, Chapter 5 para 40 and following. Smith is talking about wheat but the same basic concept applies to petrol.

The speculator at least attempts to purchase in a time of plenty, when prices are low, then sell in a time of dearth when prices are high. By doing so he raises prices when they were cheap: yes, indeed he does. But he also lowers them in time of dearth by releasing produce onto the market when it is expensive. So the net effect on hte consumer might well be nothing at all: the price has been moved through time but total expenditure on wheat (or petrol) remains the same.

Our speculators have made their profit: and if the consumers are paying the same total amount that profit cannot be coming from them. No, instead, it's coming from the original sellers: in this petrol case that's the oil majors and their refineries.

Which really rather changes this story, doesn't it? Even if the AA is right here, "Speculators rip off motorists" and "Speculators rip off oil companies" will play rather differently in the public press. And it's very likely indeed that the story is actually the second one.

Ten reasons why the Left should like the ASI, 9: Choice

The Left ought to support our campaigns to put power over these services into the hands of the people who use them.

Some elements on the Left want the state services used to mould an egalitarian society, but others should side with the ASI in wanting to concentrate instead on improving those services in line with the needs and wishes of their users.  The ASI views the centrally-planned top-down model as unsatisfactory and unresponsive, in that it delivers what its administrators think should be provided.  The ASI instead has advocated and backed reforms that have state services responding instead to the choices made by recipients.  Patients should have choices over where they are treated and, in consultation with their doctors, over which treatments they prefer.  Parents should be able to choose which school their child attends.  In both cases the state funding should follow from those choices and be directed to the institutions favoured by patients and parents.

Not everyone is equally equipped to make such choices, of course, but the ASI thinks that the choices made by those who are informed will lead the way in improving standards generally as others follow their lead.  Much the same effect happens in the production of private goods and services; it is the informed customers who improve the goods and services for everyone else as suppliers try to attract them.

This introduction of choice to allocate state funding is not only a superior model in theory.  It works in practice in some of the Scandinavian countries in both health and education, and succeeds there in raising standards as well as consistently attracting high levels of popular satisfaction.

More on the ultimatum game

A few days back I mused, almost as an afterthought, on whether the ultimatum game would be played the same way in all human societies. This is the game where player 1 gets to split $100, player 2 decidding whether or not to accept the split. If the division, 50/50, 60/40, 99/1, whatever, is accepted then both players get their money. If it's rejected, then neither gets any.

The importance of this game is that it shows that we'll actually harm ourselves in order to punish someone we think is acting unfairly. Humans thus have a deep and innate sense of fairness: or do they? For Luis Rooney (a reader here) has pointed me to this article which explains that the results of the ultimatum game are very much not consistent over human societies. There are those where people do act as that entirely rational consumer beloved of certain economists: they'll take a 99/1 split for who wants to leave a dollar on the table? There are even those where the offer starts out at 40/60 and player 2 will still reject it. These are the so called "gift" societies (historicaly, some Amerindian ones, today some Papua New Guinea for example), where acceptance of something leads to larger and more onerous burdens and obligations in the future.

This has really rather large implications for market economics. For it is that punishment of the transgressor, the unfair person trying to take advantage, which is one of the things that makes said market economies work. It's one of the things that regulates said markets: and do recall, regulation is often by social factors, not by legislation.

These differences, they believed, were not genetic. The distinct ways Americans and Machiguengans played the ultimatum game, for instance, wasn’t because they had differently evolved brains. Rather, Americans, without fully realizing it, were manifesting a psychological tendency shared with people in other industrialized countries that had been refined and handed down through thousands of generations in ever more complex market economies. When people are constantly doing business with strangers, it helps when they have the desire to go out of their way (with a lawsuit, a call to the Better Business Bureau, or a bad Yelp review) when they feel cheated. Because Machiguengan culture had a different history, their gut feeling about what was fair was distinctly their own. In the small-scale societies with a strong culture of gift-giving, yet another conception of fairness prevailed. There, generous financial offers were turned down because people’s minds had been shaped by a cultural norm that taught them that the acceptance of generous gifts brought burdensome obligations. Our economies hadn’t been shaped by our sense of fairness; it was the other way around.

Assume they're right about that causation (the piece doesn't explain how they reach that conclusion, instead of the idea that such markets thrive where the behaviour is already prevalent) and we actually find a good reason for why economic development is so hard. Why it's really very damn difficult to reach that first lift off stage. Because we're not just trying to get people to act in a particular manner, trade with people, divide labour and so on. We need to have, or the system needs to have, got into peoples' heads and changed the way they actually think before it can all happen. It's only with that change that the self-reinforcing feedbacks come into play and the economy as a whole takes off.

Which does rather put a different gloss on why some parts of the world are developed and some aren't, doesn't it? It's not because of what we've been doing to them but because, at least in part, of what is going on in both our and their heads.

We might even muse that this just reinforces the necessity of starting with markets, not with central direction, as a means of development. For it's only as the influence of the markets changes those thoughts that that lift off occurs.....

Ten reasons why the Left should like the ASI, 8: Immigration

The Left, traditionally supportive of immigration, should admire the ASI's stance in consistently arguing that the UK benefits by welcoming immigrants to our shores.

ASI writers have consistently pointed to the benefits that immigrants bring to the UK.  Their skills help generate economic activity and augment output and wealth-creation.  This is more obviously true of those with qualifications and a degree of expertise in some professional field such as medicine or finance, but it is also true of those with more modest skills.  As long as immigrants have a command of English, some education, a willingness to work and a readiness to respect our culture and values, they can make a positive contribution.  Their willingness to take on demanding jobs at relatively low wages benefits the population by enabling UK goods and services to be more widely available and to be produced more cheaply.

But migrants make more than an economic contribution.  Over the centuries successive waves of immigrants have been absorbed into British culture and have enriched it by their contribution.  From Flemish weavers and Huguenot glass-makers to Italian ice-cream manufacturers and more recently the celebrated Polish plumbers, they have made a cultural as well as an economic contribution.

Obviously any would-be immigrants not prepared to work and to integrate into our culture come into a different category, but the majority of our immigrants, and certainly most of those from other European countries, are not like that.  They want to work and get ahead, and can make a contribution to our society.  The degree of immigration matters, as does its concentration in certain areas, in that it should be within our ability to cope with the extra demands resulting from their arrival.  But these are problems that can be solved, and in no wise affect the principle that immigrants should be welcomed.

An end to zombie politics 6: Broadcasting

The government needs revenues and holds too many assets on its books. In future blogs, I will return to its holdings in finance and healthcare. For the time being, let’s look at its involvement in media, specifically broadcasting.

Is it so very wrong to confess that the BBC has been getting on my nerves since the era of the “Boat that Rocked”? Indeed, contrary to Richard Curtis’ fairy-tale, it was no bewhiskered Tory, but the sainted Beeb which connived with the Musician’s Union and that old crook Harold Wilson to suppress the pirate radio stations, replacing them with the anodyne Radio 1.

The rationale for the BBC arose when spectrum was scarce—or more accurately monopolised by the military. But this hasn’t been the case for a generation. The public service obligation is unnecessary now that bandwidth is de facto unlimited – after all, the UK doesn’t have it for the press (despite the impact of Leveson). So why carry on with a poll tax on every household for a frankly undistinguished broadcasting service? Admittedly it keeps the chattering classes quiet-ish but at the price of giving them a platform and exposing the rest of us to decades of second-rate programming. Meanwhile its news values distort national debate, though to be fair the tendency of a profession to look at things from its own perspective means journalists are bound to (and should) be inclined to have at the powers-that-be, which today could engender a left-ish perspective.

Regardless, the BBC can readily be broken up into its constituent parts: entertainment, catalogue and commercial, content generation, news, radio, minorities, regional and so on. My figures show it would raise some £5.4bn, if sold in the market, or (where there is no market value) disposed of to other bodies like charities, universities and other NGOs, as well as local authorities. I estimate that Channel Four is worth another £1.6bn for a total of £7bn. Better than a kick in the teeth, and letting the public off the cost of the TV licence, so liberating the estimated 4,500 civil servants concerned for more gainful employment.

23 Things We're Telling You About Capitalism IX

The ninth thing we're told is that even though manufacturing is becoming a smaller part of our economy, of all economies, it's still very important oh yes indeed it is! There's a certain sadness in watching the argument develop in this chapter in fact.

Chang is quite right on his facts: it isn't that manufacturing output has shrunk at all. In the UK that was rising until 2007 (and we don't know how much of the subsequent fall is recession related or structural) and it's still rising in the US. It's just been rising less than the growth of the rest of the economy: thus falling as a proportion but not absolutely. Manufacturing employment has been falling substantially: a small part of this is simple reclassifcation. The graphic designers who used to work at the factory were counted as manufacturing workers: now they take their cocaine in Soho lofts they're service workers. The majority of that workforce fall is because of rising productivity: we simply need fewer people to make ever more stuff as we become more efficient at using labour to make things.

Chang gets all of this right: then he makes something of an intellectual leap and it's sad to see the tumble into the chasm of illogicality.

Given all of the above he says that manufacturing is still important and we should work to increase the portion of the economy that is such. The argument being that as productivity is easier to increase in manufacturing than it is in services, as manufacturing becomes an ever smaller part of the economy then total productivity growth will fall. Well, yes, it will, undoubtedly (and there's rather a clue as to why productivity growth has been falling in rich societies in recent decades: because that manufacturing where productivity growth is faster has been becoming an ever smaller part of the economy).

But to then insist that we must have more manufacturing in order to improve productivity growth is most odd. For we don't desire productivity growth per se. It's nice to have, for sure, it means we can make more stuff with fewer inputs. But even with that we only actually want to make more stuff, become more efficient at making stuff, that we actually want. There's no point in becoming more efficient at making Simon Cowell for example, as we've all got a surfeit already. And so it is with things that are manufactured. We don't want to simply become more productive: we want to have more of the things that we want with the resources we've got available, not more things that are manufactured just because it improves average productivity.

It's also true that manufacturing (yes, output is rising, but as a portion) of the global economy is falling. So the advice that every country whould focus more on manufacturing is ridiculous. Manufacturing what for whom? If manufacturing is carriages and services are cars (bear with me) Chang's insistence here is like saying we should all be making more buggy whips. Sure, no one particularly wants them but we're getting ever so much better at making them that average productivity would rise as a result of doing so.

The point here being that "productivity" isn't some thing that we should reify. It is indeed the secret to rising living standards: as Paul Krugman has said productivity isn't everything but in the long run it's almost everything. What Chang's missed though is that the output is measured at market prices: if we overproduce manufactures simply because this will raise the productivity number then their market price will fall: and productivity won't in fact increase at that point, will it?

So even though his basic facts are right here his prescription still fails. For while we would like rising productivity and it's easier to raise productivity in manufacturing than servicves this does not then mean that we want to throw resources at manufacturing.

Another way of clarifying this point is that, as we said yesterday, the purpose of all production is consumption. Sure, it would be nice to be more efficient at production: but only of things that people want to consume. And as it happens, it appears that further units of services produce greater consumer surplus than further units of manufactures.

Chang also goes on to point out that developing countries must concentrate on manufactures as this is the only way to raise their general productivity, that productivity increase that by definition leads to becoming a developed country. And I'd agree that it's highly likely that the developing countries will go through their own industrial revolutions. But not for this particular reason:

"If you base your development largely upon services from early on, your long term productivity rate is going to be much slower than when you base it on manufacturing."

The confusion here is that yes, when you're at the technological frontier then improving manufacturing productivity is easier than service productivity. For when you're at that frontier there's an awful lot of head scratching and pondering about what to do next. When you're well behind that frontier then there's no particular reason to think that this is so: indeed, we might think that services are easier. Take, just as an example, retailing in India and the computer hardware industry in India. In which do we think it would be easier to improve productivity?

I'd argue in retailing, the service, rather than computing, the manufacture. To improve the productivity of retailing all we've got to allow (or, err, the Government of India has to allow) is WalMart and Tesco in to start building the standard retailing logistics chain. That's going to be far easier (and cheaper!) than trying to build silicon fab plants (and all the rest) in a country without reliable electricity supplies. Or we might argue that we could improve the various state bureaucracies by computerising them away from the current quill pen and parchment systems.

That it is more difficult for us rich world people to improve services productivity than manufacturing such is entirely true. That the same is true of those places mired in seventeenth century services productivity is not. And what's really interesting about this argument is that if services are 70% of the economy (as they are, UK and US alike) and current poor world services became as productive and efficient as ours, then we'd see those poor countries become vastly richer whatever they do about their manufacturing. Simply because they'll be getting more services for the same as the current input: that's what increasing productivity means you see?