Farmers still aren't quite getting this free trade thing, are they?

The Guardian carries a long piece about Brexit, tariffs, beet and cane sugar and so on. Should we continue to protect beet growers? Should we just abolish the tariffs and let cane rule?

Our answer is obvious, abolish the protections and see what happens. Not all agree

Even then, its farmers claim the burden of living in a high-wage economy means it is unfair to pit them against surplus cane that is dumped on the world market below the average cost of production by developing economies.

“If we are living in a higher-cost economy than Brazil, and as a society we value things that those higher costs support, then a degree of tariff protection to make that sustainable is legitimate,” argues Martin. “In an ideal world run by rational people, that is what tariff barriers used sensibly can help to balance out.”

Actually, that's the argument for cutting tariffs entirely and the heck with it. Because that very fact that we are a high wage economy is precisely why we should not be doing low value add things. We should only be doing things which add a lot of value - wages do after all reflect the value being added in the economy.

If there are people out there willing to grow sugar for $300 a month while we would need £3,000 a month to do it then we should be buying from them and not producing ourselves. We should be off doing something which adds more than £3,000 a month to justify those wages.

Again, the fact that we're a high wage economy isn't an argument to build protection around it, it's the very argument that we shouldn't be doing the low value things that poorer people in other places could be.

The Financial Confusion Authority and the Long Grass

On Sunday’s Radio 4, Lord Vince Cable asked why the FCA had still not published its report into the alleged mishandling, by the Royal Bank of Scotland (RBS), of Small and Medium-sized Enterprises during the financial crash of nine years ago.  The complaint, in essence, was the classic one that large British banks lent umbrellas to small business customers when the sun was shining and then took them away when in rained.  More specifically, it was alleged that RBS pushed customers towards insolvency through, e.g., selling them inappropriate products and/or revaluing the businesses, and then transferred them to the “care” of their Global Restructuring Group (GRG) whether they wanted that or not.

GRG had two objectives: “turnaround” and “commercial”, i.e. making as much money out of the situation as possible.  It was alleged they did this, in part, by forcibly acquiring customers’ assets cheap and selling them dear.  RBS has since recognized that these objectives were in conflict and, they claim, now supervises to ensure fair play.  Quite how it does, or even could, do that is opaque.

In January 2014, the FCA appointed the Promontory Financial Group to investigate the extent of the abuse.  Promontory, now owned by IBM, reported to the FCA in 2016.  The FCA published its own summary of the Promontory report in November.  How that differs, if it does, from the original is not clear but it is an odd document.  On the one hand it reads like a whitewash, playing down the admitted abuses, but then remarkable admissions crop up.  For example:

  • “the failure to support SME businesses in a manner consistent with good turnaround practice;
  • placing an undue focus on pricing increases and debt reduction without due consideration to the longer term viability of customers;
  • the failure to document or explain the rationale behind decisions relating to pricing following transfer to GRG;
  • the failure to ensure that appropriate and robust valuations were made by staff, and carrying out internal valuations based upon insufficient or inadequate work – especially where significant decisions were based on such valuations;
  • the failure of GRG to adopt adequate procedures concerning the relationship with customers and to ensure fair treatment of customers;
  • the failure to identify customer complaints and handle those complaints fairly”.

Two thirds of customers transferred to GRG were in fact viable and “most of them experienced some form of inappropriate action by RBS. However, the Report also concluded that, in a significant majority of cases, it was likely that inappropriate actions did not result in material financial distress to these customers.”   That does not sound like a ringing endorsement to me nor does it match up with the media reporting of RBS/GRG management actions during this period.

But why has the Promontory Report still not been published six months on, nor the FCA’s own report?  The FCA seems to have plenty of time to hound the little guys, like individual Financial Advisers, but none to uncover a potential scandal concerning one of the country’s biggest national institutions.

Finally, there is another possibly innocent but still intriguing aspect of the FCA’s long grass strategy: the role of Margaret Cheever. Ms Cheever was a Managing Director of RBS during the period under review, responsible for Banking Credit Policies and Practices and Corporate and Institutional Banking. She left to become, guess what, a Director of Promontory.  Obviously she may well have had nothing to do with any of this but it would be good for that issue to be clarified not least because conflicts of interest lie at the heart of this matter.

It's the canvas that has changed, not the economics

The Guardian carries another of those whining pieces. Where did it all go wrong? Back post-WWII the economy was just lovely, then Ronnie, Maggie, neoliberalism, privatisation, you know, the stuff we here at the ASI do, and it's been terrible since then:

The share of national income that went to the bottom 90% of the population held steady at around 66% from 1950 to 1980. It then began a steep decline, falling to just over 50% when the financial crisis broke in 2007.

Similarly, it is no longer the case that everybody benefits when the US economy is doing well. During the business cycle upswing between 1961 and 1969, the bottom 90% of Americans took 67% of the income gains. During the Reagan expansion two decades later they took 20%. During the Greenspan housing bubble of 2001 to 2007, they got just two cents in every extra dollar of national income generated while the richest 10% took the rest.

Those responsible for global financial crisis got away with it while those who were innocent bore the brunt of austerity

The US economist Thomas Palley* says that up until the late 1970s countries operated a virtuous circle growth model in which wages were the engine of demand growth.

“Productivity growth drove wage growth which fueled demand growth. That promoted full employment, which provided the incentive to invest, which drove further productivity growth,” he says.

At which point a simple but not simplistic explanation of what happened. The canvas upon which we were painting the economy changed, economics did not.

It really is neoliberalism and globalisation to blame, or thank according to preference. Consider Milanovic's Elephant Graph. Which shows whose incomes have been gaining these past decades. Yes, the 1% (note that the global 1% includes me and most likely you too, above about £25,000 a year is that global 1%) but the vast majority of the gainers have been the 10% to the 70% of people out there. China got rich, India's getting there and even Bangladesh, yes Bangladesh!, has been growing at 5 and 6% for two decades now.

All those old economic drivers, productivity, wages, demand, they're all still working away. It's just that they're operating on the global economy now, not just a small series of national ones. And as before the gainers are the poorer end of society.

30 years back the great demand was that we must aid that global South to develop. Excellent, it's happening, why is everyone complaining?

There's nothing quite so conservative these days as a worried liberal

That's liberal in the American sense you understand, a wet left winger. As with Will Hutton here:

The internet celebrated its 28th birthday a fortnight ago. It’s an invention that ranks alongside the wheel, immunisation against disease and the internal combustion engine as a transformer of human existence. As an open information digital connector, it is an extraordinary force for individual liberation, embodying the very best of Enlightenment values: more information is available to more people through their mobile phones and personal computers than ever before.

The world can then follow the Enlightenment injunction to dare to know to a degree that the great philosophers, arguing for a free public realm where information and evidence could be openly marshalled and tested for human betterment, could never have foreseen.

Over the last 18 months, it has become obvious that the internet is the most serious threat to the Enlightenment values it purports to represent.

The Enlightenment was about more people gaining more access to more information in their own language. The King James Bible, as with Wycliff before and the equivalents in other languages of translations into the vernacular, were really the start of it all. And now that very same process, where more people gain more access to more information in their own language is a threat? 

Well, yes, it is actually, but it's a threat to a certain set up, not to the idea itself:

Worse, the advertising draining from newspapers is reaching such a scale that the viability of a free press is under threat. Online newspapers can charge subscribers, but still need advertising to support journalism and the expensive edifice of complying with publishing law. At the very least, as upholders of true news, they should be competing with Google and Facebook on equal terms.

The world of cushy berths is threatened, berths where four digit weekly pay checks are distributed for an hour's work on a column. That's the actual complaint and that's the threat, not to the Enlightenment or its values but to the people who have done very well out of he current structure. Thus the most conservative insistence that nothing must change.

The most outrageous drivel

Terrible events have the capacity to bring out the most dreadful drivel in society. The murder of PC Palmer appears to be doing just that:

The website running a fundraising campaign to raise money for the family of murdered policeman Pc Keith Palmer is refusing to waive its five per cent fee, The Telegraph can disclose.

The fundraising page set up by JustGiving for the Metropolitan Police Federation has raised over £670,000 by Friday night. 

This means that JustGiving - which pockets 5p of every pound donated - is likely to receive around £33,500 in administration fees.

It costs money to run a website. It costs quite a lot of money to run one which can work at scale.

The website takes a cut from most donations. While some of the money is used for maintenance, product development and charity training, accounts allegedly show that more than £10million was spent on staff costs last year.

People were paid for turning up to work? What horrors!

As it happens, JustGiving spends all the money it earns on developing the services of JustGiving. There's not even some rapacious capitalist behind the curtain. Although if there were we'd be defending them too:

He said: "The unfortunate thing is that they are a business and there is no other way of doing it other than asking people to go to bank and pay the money in over the counter."

We are enriched by the service they offer, as is true of all of the other things that we voluntarily spend our own money upon. Seriously, where did this drivel start, that people should not make a living giving us what we want?

The Tax Justice Network makes another unsubstantiated claim

The Tax Justice Network has just told us, once again, that countries lose gazillions in tax revenue to tax dodging. However, their claim is not in fact true. Specifically, this is not true:

We focus now on the long-term estimates of the revenue (in per cent of GDP) lost by each country i in period t as a consequence of profit shifting through tax havens in 2013, i.e. 𝐿𝐿𝑖𝑡. 

They are not measuring long term revenue anything. For they are not measuring the effects of the corporation tax rates they look at.

Imagine, for example, that a country had a corporate profit tax of 100%. There would be little to no corporate activity leading to profit to be taxed. The country would be dirt poor in fact. Thus there would be little revenue.

Equally, a tax rate of zero would encourage activity like billy oh. And revenue would be gained from other taxes instead, like the consumption of the workers now gaining higher wages, even perhaps their income tax.

This is, of course, the Laffer Curve argument and just like that argument it is something which is true at some level of taxation. Lower rates will increase revenue, higher rates reduce them.

We're not insisting that current rates are either above or below that revenue maximising level, not right here and right now we're not. But we do insist that failing to even consider the point means that no estimation of long term revenue losses has in fact been made.

We'd also point out that going over that revenue raising rate is easier than many think. The combination of three things made it probable that the UK corporation tax system in the UK in the 1970s managed this. High inflation, a corporate tax system which did not rebase costs on that inflation and relatively high tax rates meant that corporate capital wasn't even earning enough to cover depreciation in some of those years.

It really is necessary to consider the wider effects, not just do sums as the TJN has done. But then, you know. This is the same researcher who insisted that Zambia was losing squillions in revenues by comparing the price of tens of thousands of tonnes of copper in that country with the price of 10 kg samples of copper in Switzerland. Experimental design might not be the strongest suit here.

Save the environment — don't buy local

Those who encourage us to buy locally often do so with the view that reduced transport distances will result in less CO2 emissions. Seems simple, but what such people neglect is the fact that the majority of emissions associated with getting products (particularly food products) from producer to consumer are not from transport. Rather, the majority of emissions come from production.

A paper published by Christopher L. Weber and H. Scott Matthews in 2008 found that the Greenhouse Gas emissions associated with food are dominated by the production phase which…

contributes 83% of the average American household’s yearly footprint for food consumption. Transportation as a whole represents only 11% of life-cycle Greenhouse gas emissions, and final delivery from producer to retail contributes only 4%.

Production is less energy intensive when it takes place in optimal weather conditions, on large scale farms with machinery and fertilizer to make things incredibly efficient.

Not too long ago, DEFRA released a report saying that the carbon footprint of Spanish grown tomatoes is smaller than that of UK grown tomatoes. Clearly something very similar is happens in the UK.

It might also be worth mentioning that food (especially food that must travel long distances) is generally transported in bulk, increasing efficiency. Further, the majority of food miles are from the supermarket to fridge, which will not change, even if your food is produced locally. Plus, food from far abroad is often cheaper than local alternatives. In this way, globalisation is saving you money, and saving the environment.

Another paper in 2000 revealed the exact same thing applies with flowers. Economists Vringer and Blok compared the energy use associated with Dutch and Kenyan cut flower production. Air freighted Kenyan roses transported to Europe were found to have a lower total energy footprint than the Dutch grown roses.

So perhaps this mother’s day, we should aim to buy both food and flowers from as far afield as possible, because we don’t just love our mothers, but we also love the environment.

This doesn't bode well, does it?

Clearly, a would be Labour Chancellor is going to have rather different views on a just or reasonable taxation system than ourselves. But we are usually able to agree upon history. That seems not to be the case with John McDonnell:

It was under Osborne’s watch that the bank levy, introduced by the last Labour government to claw back some of the astronomical returns major banks had been making, was phased out, in his first budget after the 2015 election. 

No, that's not what happened at all. Alistair Darling imposed a tax upon bonuses. That was an idiot piece of lashing out. Osborne imposed the bank levy. This was an excellent piece of taxation.

Too big to fail banks enjoy an implicit subsidy from the rest of us. If they totter they will be rescued - that's what we mean by too big to fail, they're too big for us to allow them to fall. This is both a potential cost to us and also a subsidy to their profits for that insurance means they can borrow at finer rates. The solution is simply to charge them an insurance fee in the manner that, say, the FDIC charges banks over the pond for that guarantee upon deposits, as is also done here.

The tax was also calculated correctly. It was upon bank liabilities - what they owe to others, or, as we can also think of it, upon deposits. For a bank over a certain size, that too big thing, tot up deposits which are not already covered by various insurance schemes already being paid for. Apply a risk weighting - at sight deposits are riskier than long term bond issues for example. Charge that insurance fee.

This is, in essence, a Pigou Tax on being too big to fail.  It is excellent taxation.

Of course, Osborne, as is his wont, then messed it up, firstly by targeting the revenue yield rather than the behavioural change desired, then by getting rid of it in effect but then, you know, perhaps people who yearn to be journalists aren't quite the right choice as Chancellor.

But back to McDonnell. It's clear that we'll have differences with his plans for the economy and tax. But we really would hope that a Shadow Chancellor would know his history, especially of one of the few good taxes that have been imposed in modern times.

Brexit gives us a chance to try the world's most effective anti-poverty programme

It's hard to predict what Britain's relationship with the EU will be like once the dust settles in April 2019, but the odds that free movement will continue in its current form are slim. I think that's real shame; as Sam Bowman points out, EU migration has been incredibly beneficial to the UK. EU migrants haven't lowered wages or increased unemployment, they've simply helped us pay down our eye-watering debts (by about £1.5bn a year).

The Government instead seem to prefer what they call a "bespoke immigration policy" with different rules applying to different sectors. In other words, a centrally planned labour market. That'd be a bitter disappointment: it'd mean increased bureaucracy and slower growth for Britain's businesses.

But, as the saying goes, every cloud has a silver lining. It gives us a chance to enact the most effective anti-poverty policy ever discovered.

One sector with a particularly pressing need for low-skill migration will be agriculture. Farmers rely on cheap, seasonal labour. If they can't get it many will be forced to close as they lose out to foreign competition. Most countries rely on seasonal migration programs, indeed Britain itself had one targeted at Romanians and Bulgarians as late as 2013.

But as much as farmers benefit from access to seasonal migrant labour, it's the migrant workers themselves that see the biggest benefit as a new study from the Centre for Global Development's Michael Clemens and Hannah Postel shows..

They looked at a program that loosened regulations in the wake of the Earthquake in Haiti to allow more Haitians to get seasonal worker visas. Clemens and Postel compared Haitians who got seasonal visas to those who were unsuccessful. The results were staggering.

Haitian migrants saw massive income increases. On average they saw their incomes multiply by around fifteen times. And they didn't just spend that on themselves, they helped those stuck back in Haiti by sending remittances. In fact, they were able to double their families annual income in a matter of months.

The paper's authors point out that these results are unprecedented. No other aid programme comes close to producing income benefits on this scale.

It's certainly proved to be a much more effective program than the many recovery projects targeted at Haitians. Haiti received $13bn in humanitarian aid after the 2010 Earthquake, but the results have been dismal. An NBC News report in 2015 found that five years on, there were still 85,000 Haitians living in displacement camps.

Migration beats traditional aid projects for three main reasons.

  1. It goes straight to those who need it. A significant chunk of foreign aid is eaten up by overheads (29% on average according to Bill Easterly). Now that wouldn't be a problem if the aid itself (the other 71%) was effective. But too often it's not spent well. It's rare for a project to raise the incomes of the poorest by more than £1 for each £1 spent. It's different with migration, all of a seasonal worker's earnings end up in a Haitian household where nearly 85% is actually spent in Haiti. And once it's spent it Haiti it spurs on even more productive activity.
  2. It's not a free lunch, it's a paid lunch. We're fond of saying there's no such thing as a free lunch, but in this case it's one better. We're not just lifting people out of poverty for free, we're actually benefitting from the exchange. These jobs simply wouldn't exist in the absence of seasonal migration programs. Locals wouldn't do it at a competitive wage - so farmers would have had a choice automate the jobs or lose out to foreign competition. When Haitians come to the US, they'll be spending and paying taxes boosting the local economy.
  3. It delivers massive financial flows to the developing world. The big reason though is scale. Because a person's productivity varies massively based on where they are - compare an Uber driver in London to a rickshaw driver in India - moderately opening up to migration can deliver gigantic financial flows to the world's poorest. As Clemens put it once, we're leaving "trillion dollar bills on the sidewalk".

These schemes certainly have their critics. Many argue that workers are liable to be exploited on seasonal programs – some have gone as far to say that they're close to slavery. But Clemens and Postel spoke to the Haitians who got visas. They replied that they wouldn't change the program if they could and the only concern they had was that the program would be cancelled and they wouldn't be able to work in the US.

Given the current appetite for greater migration control, it's unlikely that we'll see the level of expanded migration that Clemens and myself would like. But, we can take action at the margin.

New Zealand shows the way. They amended their seasonal worker program to encourage greater migration from Tonga and Vanuatu. That boosted incomes of Tongan and Vanuatuan migrants by factors of 12 and 8 respectively. That's miles better than many (if not all) of the aid projects DFID currently funds and again, free. Let's take New Zealand's lead and use Brexit as an opportunity to try out the world's most effective anti-poverty policy.

A Capital Idea - turning nominal ownership into real ownership

A Capital Idea - turning nominal ownership into real ownership

By giving capital funds to everyone, they would provide something which the poorest third a currently lacking – a capital pool that grows over time and could provide a cushion against some of life's contingencies.  Each account would be the property of the owner.  Instead of dying with them as many pensions do, it would be a heritable asset whose full value could be passed on to their children or to other heirs and successors.