Perhaps we should admit it outright, we're just unpatriotic

According to Polly Toynbee we're unpatriotic:

Patriotism – pride in the country – is undermined by every failure in the public realm. Since 2010, this government and its coalition predecessor have followed an ideology of cuts, intent on reducing the state to a pitiful 36% of GDP, far below any equivalent EU country. Leadsom, hear this: shrinking the state is the opposite of patriotism – a betrayal of country and people.

The EU country which is perhaps most equivalent to us - we share language, the Common Law and an awful lot of often fractious history - is Ireland which has a smaller state than we do and is also about as rich (no, ignore GDP here, we must use GNP). Of the OECD countries Switzerland is richer, also has a smaller state. That's probably because of he postcode lottery that Polly so bitterly decries. The central state at Berne deals with the peace, easy taxes and tolerable justice bit, everything else is done by the cantons in myriad different manners.

So it's at least not obvious that shrinking the state is such a bad idea.

But then the idea that patriotism is defined by the size of the state in the first place is trivially stupid, isn't it? We're entirely fine with the idea that how well the place is governed can be related to how patriotic we all are, but the idea that the amount of money defines it is ludicrous.

But then, you know, Polly. She always has insisted that it's not how we spend the money that matters, it's feel the width, see how much we are.

 

Basic Income 101

The July 2017 edition of Reason magazine contains a fascinating article by Jesse Walker that provides a comprehensive history of Basic Income: from the concept’s murky beginnings in 1795 to contemporary experiments in unconditional transfers and similar initiatives by governments and NGOs around the world. The ASI has championed the (virtually identical) idea of a Negative Income Tax since the 1970s, and the number of supportive voices for such schemes has grown significantly in recent years.

European countries such as Finland and the Netherlands are in the early stages of basic income experiments, but the most dramatic tests of the concept are being conducted in the context of poverty alleviation in the developing world. In the piece, Walker raises the example of GiveDirectly:

“Having moved from conditional to conditionless cash payments, GiveDirectly's directors started thinking about taking another step and experimenting with a full-fledged basic income—not just payments to a village's neediest families, but a long-term income for everyone in town, one set high enough for people to live on it. Other aid groups had already conducted experiments along these lines in India and Namibia; the results appeared to be favorable, but these studies were too short-term to draw firm conclusions from them, and the Namibian experiment had the additional problem of not being randomized.”

Walker also highlights that despite reasonable dissent (and inevitable ‘anything but the outgroup’ opposition) from across the ideological spectrum, there are currently a wide range of political positions that include elements of support for basic income — something that has been the case for several decades:

“As in the 1960s, the interest is coming from many different directions. Center-left wonks perceive the basic income as a more market-friendly approach to welfare policy. Radicals hail it as an alternative to the "neoliberalism" they associate with those same wonks, imagining a day when work is detached from income and we live in a world of postscarcity abundance. Silicon Valley figures hope it will help us survive the upheaval to be unleashed when artificial intelligence wreaks havoc on labor markets. Libertarians see it as a way to simplify the welfare maze into a cheaper and less intrusive single program.”

If you’re looking for an engaging, accessible, and detailed introduction to the basic income “movement,” look no further than Walker’s essay.

Is austerity over?

Everyone is excited about the prospect of austerity ending. It’s understandable. The effects have been gruesome for lots of people and the politics of it are becoming quite difficult. In many respects it is a victim of its own success. It's only because we had austerity, cutting the deficit from 10% of GDP to 3% or so, that we can talk about ending it now. But it's quite likely premature:

  1. The deficit is 2.5-3%, depending on what measure you use. Most of that is current expenditure, rather than investment. During the early years of austerity, lots of people said that the time to cut spending was when the country was growing – fix the roof while the sun is shining. Well, the sun is (sort of) shining now and they're against cutting spending now too. If something happens in the next few years – Brexit goes wrong, China has a downturn, the Eurozone collapses – we'll be in an even worse position than we were before 2008 and we'll have even more difficult cuts to implement. The low-hanging fruit have been picked!
  2. Even though the deficit is fairly low now (compared to where we were in 2010, anyway), the debt-to-GDP ratio is 90%. Debt must be repaid, so borrowing is just deferred taxation, and is invisible to most voters. The danger is that people vote for spending rises that do not have commensurate tax rises now, and so vote for more spending/tax than they would if they felt the tax cost of the spending as well as the benefits. The higher taxes eventually needed to pay off the debt will be economically costly.
  3. Raising taxes now to eliminate the deficit is legitimate and better than borrowing, but if you raise taxes that affect growth (eg, on investment) you may end up making us poorer – maybe much poorer, if the taxes are on investment – in the medium- and long-run. 
  4. Government borrowing—outside of a period of mass unemployment—can only come out of activity elsewhere in the market. Empirical work bears this out too. You can’t employ people to build schools and also to build factories. Maybe Keynesians are right that this isn’t an issue when interest rates hit zero, but rates on gilts—not to mention every other market asset—have shown no sign of doing so.
  5. The Tories are exaggerating the extent of the changes for PR reasons. They want to look like they're "learning from the result". But spending plans already had deficit only being closed in 2025 – back in 2010 it was supposed to be 2015, a date which was then pushed back repeatedly. The public sector pay freeze (which only allowed 1% pay rises per annum, effectively a real terms cut) was brought in in 2013 – it is not synonymous with ‘austerity’ and as long as things like the welfare cap remain in place it’s not at all accurate to say that austerity has ended.
  6. Getting rid of the public sector pay cap might make sense for other reasons. When it was introduced, public sector pay was quite high compared to private sector equivalents. That’s changed, and (eg) recruiting nurses is becoming difficult. Just as any private firm should, when you can’t hire the workers you need, you need to offer higher wages.
  7. The welfare cuts were balanced out by lots of folks getting jobs. Unemployment at 4.7% takes a lot of the sting out of welfare cuts (though the worst are yet to hit). Food banks are mostly used by people who haven't received their welfare (or wages) on time – that is, it’s a function of a badly run welfare system, not necessarily one that is giving out too little money. (Maybe it’s badly run because the system is underfunded.) The welfare cap of £20,000 per household (£23,000 for London) affects about 88,000 families, mostly large families and families with high housing benefit bills. Politics aside, this is probably going to hurt people more severely with less fiscal benefit than the public sector pay freeze – but this was the cap that both the Tories and Labour (according to its manifesto) are apparently in favour of keeping.
  8. The cut in investment under austerity was bad, because projects with positive benefit-to-cost ratios that the private sector can’t carry out should go ahead as long as the government can borrow reasonably easily. If politics makes this impossible, the government should be trying to unlock some of the £2.5 trillion in pension funds for investment in infrastructure – it's more important to fix the rules than to borrow even more. But borrowing to fund current spending is the real problem, and it would probably be better if we only spoke in terms of that, and kept capital expenditure conceptually separate.
  9. Austerity probably didn't hurt the recovery – the UK had fastest growth in G7 between 2010 and 2015, while implementing harshest or second harshest spending cuts (US was arguably harsher and also had strong growth). Since we have an inflation targeting central bank, the reduction in spending and hence the macroeconomic impact of the cuts was mostly offset by easier monetary policy.
  10. If austerity really is politically impossible (ie, if they stick with it then Corbyn gets in), then the impetus for pro-growth policies is very high, because eliminating the deficit by means of growth now becomes the name of the game. For that, it’s all about housing, tax reform and infrastructure.

Is Amazon's takeover of Whole Foods anti-competitive? Probably not.

A few days ago, Amazon announced its plans to purchase the predominantly USA-based grocery retail chain Whole Foods for almost $14bn. Although both companies operate in many countries, the main competition issues (if any) are likely to arise in the US, were both companies have a non-negligible presence.

Indeed, this announcement has resulted in a number of people claiming that the proposed merger will be anti-competitive. Specifically, there are some claims that the merger would result in 1) bundling and foreclosure of rivals; and/or 2) predatory pricing. In short, the first theory of harm posits that Amazon would force customers that wanted to purchase its distribution (or other) services to also purchase from Whole Foods (or vice versa), while the second theory of harm suggests that the merged entity would price below cost in order to drive out rival grocery firms before increasing prices once those rivals exited.

Importantly, both of these theories of harm require that the merged entity have some form of "market power" (i.e. the ability to charge a price above the competitive level and to act independently of its rivals). Typically, this is most likely to occur when a firm has a share of sales in a particular market of over 40%. However, as a general point, these theories of harm gloss over the fact that Amazon and Whole Foods' shares in grocery sales are tiny - less than 5% combined in the US. As such, it is difficult to see how the combined entity can have any market power.  Clearly, the merged entity would not satisfy this for sales of groceries at the moment of the merger.

Bundling

However, others might argue that Amazon does have a sufficiently high share of sales of "online retail" to be classed as dominant. As such, they argue that Amazon could "leverage" its power in that area to grocery retail by bundling some of its services with those of its groceries. However, as the merged entity will be active at the retail level of groceries, it is not obvious exactly what other services offered by Amazon could be bundled with them - for the bundling strategy to work, consumers would still have to want at least one of the items in the bundle, and could continue to purchase them separately from Amazon or elsewhere anyway. Hence, there does not appear to be a viable mechanism through which this bundling theory of harm could occur.

Predatory Pricing

Moreover, for the predatory pricing theory of harm to be valid, there must be strong evidence that 1) the merged entity would price its groceries below some measure of cost that represents the extra cost that would be incurred by supplying one extra unit of output (usually measured as average variable cost of long-run average incremental cost); and 2) it would have an incentive to do so.

The first condition is notoriously difficult to prove - one first has to decide which costs should be included / excluded in the measure (which really isn't as easy as one would think - e.g. should advertising spend that applies to brand-related marketing, but isn't specifically related to groceries, be included), as well as deciding the relevant time-frame over which costs are assessed.

The second condition requires proving that the merged entity would become dominant (and therefore be able to recoup the losses it had made in pricing below cost) in the future. This is where the theory of harm becomes incredibly speculative - it assumes that sufficient sales would switch to the merged entity from rival grocery firms that the merged entity would be dominant. In other words, it assumes that pricing below cost would be sufficient in and of itself to persuade consumers to switch (regardless of e.g. quality of service provided) and that rival grocery firms would not respond in any way to the merged entity's actions. Clearly both of these assumptions are likely to be violated in practice and, as such, the predatory pricing theory of harm seems unlikely.

Summary

Given that the merged entity is unlikely to have the incentive or ability either to bundle its products together or recoup any losses made from pricing below costs, both of the theories of harm currently being bandied about are unlikely to be valid. As such, it is difficult to see how the cries that the proposed merger is anti-competitive are anything more than "a big firm is buying someone so they have to be stopped". That should not be a basis on which a merger can be prevented.

 

Government can't even give away free money

One for the Annals of Government Failure:

A damning report into a disastrous £178 million Scottish government IT project that has left farmers without vital grants has uncovered a series of errors which will now have to be fixed at even greater cost to the taxpayer.

One of us has direct business experience of building IT systems. This is not good news:

One of the main problems has been a lack of documentation showing how the system was put together.

The report said: “The level of documentation is poor and is a critical risk to future stability. In many cases design documents don’t exist, in many others the design document does not match what has been built”

In one passage on corners being cut, the experts said: “It is evident that quality has been compromised in many areas (including architecture, design, analysis, coding, testing, governance, quality assurance of design, coding and implementation) to expedite delivery.”

What has been built isn't what was planned and no one does know what has been built because there is no documentation. There're just bits of code which interact but, unfortunately, don't work. No one knows why either.

But this is worse than just yet another government IT system which doesn't work. There are only 18,500 Scottish farmers getting subsidies in the first place. The IT system cost here is thus near £10,000 per farmer. And note, that's the cost just of the system to work out who to give the free money to.

OK, it's not really free money as we've all paid the taxes to the EU which then comes back as farm subsidies. But viewed in isolation it is.

It's not even that the system is complicated. Most of it is area payments, we know the size of the farms. If one clerk processed one farmer per day then a hand wavey estimate of the running cost of the system, purely on paper, would be £4 million a year.

This is an excellent example of why we want to have minimal government. Simply because government's not a good way of doing things. Really, we ask you, spending the thick end of £200 million to fail to give free money to under 20,000 people. This isn't a system we want to use for very much, is it?

The EU's got it all wrong on Google

By fining Google £2.1bn for giving special prominence to Google Shopping in shopping-related searches, European regulators have made exactly the same mistake that they and US regulators did when they fined Microsoft for bundling its Internet Explorer with Windows in the 1990s (a decision that even Lawrence Lessig, who led the first case, now says was wrong).

The basic error is to assume that Google or Microsoft’s dominant position in the market is unchallengeable – that they are akin to ‘natural monopolies’ like, say, water or electricity companies, and can use their position to exploit consumers – and that instead of competition between platforms being able to take place, they must brute-force competition within those platforms. But Microsoft’s market dominance was much more vulnerable than it seemed, and normal pressures of competition and innovation were what did for Windows in the end, no regulators needed. Windows is now only the operating system for 14% of devices shipped, and Android is the most-used operating system for browsing the internet.

An analogy is mobile phones: if you assume people are locked into using some kind of Android phone, then the preeminence that Google gives to its own products looks like a big problem. But when you realise that there are alternatives to Android, like iPhones, competition within the platform begins to look less important than competition across platforms. 

And forcing within-platform competition might make the product worse – look at how vertically integrated iPhones are, which allows things like frequent software updates (something Android badly lacks), and how Google products (like the Pixel) have been moving towards that sort of model too. It also deprives the company of a revenue stream that makes investment in the free product, like search or Android, possible.

Finally, bundling or integrating price comparison tools might be good for users who are less tech-savvy and would normally go for a 'trusted' but more expensive retailer. If you don't realise that SkyScanner exists and would normally just go with BA every time, it could be very useful to get Google Flights right up top, showing that Ryanair does what you're looking for much more cheaply.

So it’s not even clear that prioritising Google Shopping results is bad for consumers – it may lead them to be more price-conscious and to shop around between merchants more. Even if it is – because it’s worse than some alternative price comparison site, for example – there is still no case for punishing Google for giving it special prominence. If Google Shopping is worse for consumers then it must be acting as a revenue raiser for Google, and a de facto way of charging for use of Google search (and other free Google products). 

If people can switch between platforms it doesn’t matter that much if, within a platform, there isn’t that much competition. Prioritising a particular shopping search engine is not akin to gouging water users with higher prices because there are alternatives to Google that users can switch to easily. If the overall user experience is made worse by Google Shopping being prioritised, then users will have the option of moving to a search engine like Bing which is perhaps less good as at search but better overall because it does not prioritise a bad shopping tool. Indeed Bing has specifically targeted Google Shopping, which they say is worse than their own tool, to get users to switch. And there is an incentive created for entrepreneurs and large existing rivals of Google like Facebook to create their own, rival platform.

Along with this broad point there are some specifics about this case that make it even weaker. It doesn’t take account of how people do online shopping: as well as search engines they also use things like Amazon and eBay, and they get advice about things from social sites like Facebook and Instagram. And bundling clearly doesn’t work that well for Google if the product isn’t that good – Google Flights gets special prominence if you search for flight information, and rivals like SkyScanner and Kayak are doing fine.

But the core issue here is whether we need to force competition within software platforms if competition exists between them. Just as Windows users moved to other operating systems (both on mobile with Android and iOS and desktop with Linux and Apple’s OS X), Google users have plenty of alternatives they can switch to if they think that Google’s bundling worsens the platform’s quality enough. Bundling has benefits as well as costs, because it pays for the free things Google does and allows for more streamlined use of software. Trying to stamp it out will end up hurting users in a misguided quest to help them.

So why is it that we don't include the effects of the NHS in our inequality calculations?

As we all know we face a veritable plague of inequality at present. The various numbers are up to Victorian levels of top hats consuming everything and the orphan waifs starving in the streets. Except, of course, we have a remarkable absence of both the starving waifs and the plutocrats exploding from the volume of their own consumption. So, there must be something wrong with the manner in which we are measuring that inequality.

One of the things, not the only one but significant, is that we're not measuring the inequality reducing effects of government spending. That all gain access to health care is just fine by us even if we're not greatly enamoured of the details of the current NHS. But everyone having access to health care is quite obviously a reduction in inequality, isn't it? For if we all have equal access then we're all equal, right, in at least this manner? 

But a new paper, via, tells us that there's more to it than this:

Second, there is a mostly negative correlation between patient income and medical spending within all countries, except Japan and Taiwan for the over-65s and Taiwan and the US for the under-25s.

More is spent on the health care of the poor than the rich.

The (mostly) negative correlation between income and medical spending within all countries suggests that medical systems typically act to redistribute resources from the rich to the poor.

No one is really going to argue that the rich shouldn't pay more of the cost of the society than the poor do, even Adam Smith plumped for more than in proportion. But if the consumption of the state supplied goods is also pro-poor then we're again less unequal than the normal numbers suggest.

Or as we've been saying for some time now, inequality just isn't as high as the usual numbers suggest. For none of them ever do include the effects of a major thing we do to reduce inequality, the welfare state.

The allure of socialism

The urge to improve the world is a powerful one.  We see suffering and deprivation and stunted lives, and we want a world in which as many as possible can live decently and aspire to live fulfilled lives instead.  We think like this because we are human and share what Adam Smith called 'sympathy' with our fellow human beings.  Today we would call that 'empathy,' and it is what drives us to improve the lot of others if we can.

Some people yearn to replace this imperfect world with a better one conceived in the imagination, and in their mind they echo the lines of Fitzgerald's Rubaiyat of Omar Khayyam:

 

"Ah Love! could thou and I with Fate conspire

To grasp this sorry Scheme of Things entire,

Would not we shatter it to bits -- and then

Re-mould it nearer to the Heart's Desire!"

 

F A Hayek called it "The Fatal Conceit" to suppose that we can, with our limited mental resources, think up a better world than the one created by the input of countless people over aeons of time.  It is part of the allure of Socialism, which in theory proposes a world in which we are all more equal, and in which we do things collectively for the common good.  Socialism in practice has always been different, involving oppression, deprivation, blighted, limited lives, and often torture and mass murder.  Its practical record has barely diminished the enthusiasm its acolytes accord its theory.  Many of them become apologists for the atrocities committed when it is applied in practice.

The spontaneous order produced when people are allowed to interact freely with others contains more knowledge than any individual mind can hold.  It is faster to react to changes that could affect it adversely, and it does not involve forcing people to conform to the lifestyles that others would have them live.  It gives men and women space to improve their lives by pursuing their own aspirations rather than any goals that others would have them follow.

If it is folly to suppose that this world can be replaced by one dreamed up in the imagination, it is certainly not folly to suppose that it can be improved.  We can address its perceived shortcomings, experimenting with ways to overcome them, and persisting with those that achieved the desired results in practice.  The last 250 years have seen spectacular improvements in the human condition, and the last 25 years have seen many of those improvements rolled out on a global scale.  Advances have been made by virtually every measure of the human condition.  People live longer, no longer prone to diseases that ravaged their predecessors.  Fewer women die in childbirth, fewer children die in infancy.  Fewer starve or are malnourished.  More are literate, more educated.  It is a record of achievement unparalleled in the history of our species.

Karl Popper referred to a process of "piecemeal social engineering" by which we seek to improve the world by judicious inputs targeted at its failings, a process of evolution rather than the revolution that Marx sought and which his latterday followers still seek.  It is an empirical process that concentrates on practical improvements.

It may be true that young people are less patient, and more inclined to embrace idealistic schemes of total change than are older people, some of whom have lived through the catastrophes brought about when ideologies have been imposed upon the real world.  It seems paradoxical that many young people, the ones who cope more readily with a world of flux and change, should embrace an ideology whose goal is a settled world.  It seems equally paradoxical that many older people, who are supposedly ill at ease with churn and change, should embrace the system of markets and trade that is characterized by constant innovation.  It might be experience of reality that explains this apparent paradox.

Many advocates of socialism suggest that the tyranny introduced by socialist regimes in practice is an add-on that distorts and perverts ‘true’ socialism, but it seems more likely that compulsion is an evil lurking at the very heart of socialism.  It requires people to behave in ways which, given a choice, they would not freely choose.  Therefore they must be constrained to behave as all good citizens of the new utopia must…

Will we ever stop banging on about minimum wages

The link between the minimum wage and unemployment is a touchstone with many of us who broadly believe in free markets, because if we're wrong about this, then we might be wrong about a lot of things.

The supply and demand model is one of economics's most enduring, intuitive, tractable, and predictive frameworks. Yes, there are always going to be many examples it doesn't apply to. Some things are too complex to be framed in that way, or beset with market failures. But basic market transactions should work the way it says. Slapping a blunt price floor on something as basic as labour should have very perverse effects.

And broadly, this is what the literature says. I know this because I've read nearly every minimum wage paper ever written. But it's not what all of the literature says. Everyone now agrees that in most cases minimum wage hikes do not lead to immediate appreciable drops in employment considered over the whole population.

The debate is mostly over which control groups and other methodological techniques we should use. Two new papers illustrate that minimum wage defenders should not see the work of Card & Krueger and Dube as the last and only word. There is more coming out all the time.

The first (pdf) is of Danes. When Danes turn 18 they face a sharply higher minimum wage, and a lot of them get fired on their birthday or soon after. But total wage payments are about the same—many get fired, but some get more per hour.

On average, the hourly wage rate jumps up by 40 percent when individuals turn eighteen years old. Employment (extensive margin) falls by 33 percent and total labor input (extensive and intensive margin) decreases by around 45 percent, leaving the aggregate wage payment nearly unchanged. Data on flows into and out of employment show that the drop in employment is driven almost entirely by job loss when individuals turn 18 years old. We estimate that the relevant elasticity for evaluating the effect on youth employment of changes in their minimum wage is about -0.8.

In this methodology the actual rules stayed the same for the whole study, but eligibility changed over the lifespan. By contrast, a new NBER paper looks at the imposition of a considerably higher minimum wage in Seattle on the low-wage sector: those who might be affected. Seattle rapidly hiked its minimum wage from $9.47 to $11, in 2015, and then to $13, in 2016.

Their results were in some ways starker than the Danish findings, since the higher wage per hour was far more than outweighed by the lower total hours.

Using a variety of methods to analyze employment in all sectors paying below a specified real hourly rate, we conclude that the second wage increase to $13 reduced hours worked in low-wage jobs by around 9 percent, while hourly wages in such jobs increased by around 3 percent. Consequently, total payroll fell for such jobs, implying that the minimum wage ordinance lowered low-wage employees’ earnings by an average of $125 per month in 2016.

Is it too soon to predict that eventually we'll all agree that the supply & demand model broadly works, even in the case of low wage labour?

This is really most odd from Shelter, most odd

Apparently the poor will all be taking advantage of that liberty also available to the rich, sleeping under bridges:

More than a million households living in private rented accommodation are at risk of becoming homeless by 2020 because of rising rents, benefit freezes and a lack of social housing, according to a devastating new report into the UK’s escalating housing crisis.

The study by the homelessness charity Shelter shows that rising numbers of families on low incomes are not only unable to afford to buy their own home but are also struggling to pay even the lowest available rents in the private sector, leading to ever higher levels of eviction and homelessness.

Clearly not desirable but is it actually true? ONS keeps an index of rents.

Private rental prices paid by tenants in Great Britain rose by 1.8% in the 12 months to May 2017; this is unchanged from April 2017.

But note that this is nominal. Inflation more generally for that 12 months was 2.9% wasn't it? It's true that we are seeing real wages falling as they seem to be running at about 2.5% nominal. But if rents are rising more slowly than general inflation, more slowly than nominal wage rises  then that must mean that rents are falling in real terms.

Falling rents and rising rents are not compatible findings of evidence, are they? And as ONS says about London the reasons why rents are falling are:

Growth in private rental prices in London continues to slow, increasing by 1.3% in the 12 months to May 2017, down from 1.4% in April 2017. New build constructions, buy to let investors and accidental landlords have led to high levels of stock available to rent in the capital according to Savills. This view is supported by Countrywide, who report that rental stock was growing at a faster rate than demand in London, pushing down rents.

We would not claim that this is something that is solved. But at least some of the things that need to be done to solve it seem to have been done. There's more housing stock on the market and given that markets do actually work this is reducing prices in real terms. But it does appear that at least some of the things needed to solve the problem have been done because the numbers are moving in the right direction to solve the problem.

Far from the imminent disaster predicted by Shelter we seem to be retreating from said disaster.