Entirely the wrong decision on climate change in Paris


What is so maddening about this climate change kerfluffle is that everyone, but everyone, seems to be determined to make the wrong decisions, entirely ignoring everything they are being told by the scientific consensus on the subject. There've been a number of reports chewing over what should be done, assuming that the case for doing anything has been made, and they all say much the same thing. That this decision just announced is wrong:

A new UN climate change deal is expected to commit the world to trying to limit global warming to 1.5C - despite warnings the target cannot be achieved because people will never vote for the costly policies it would require.

The highly ambitious goal would require such a radical shift to expensive green energy that it would be impossible in a democratic society, a leading academic warned last night. It would also require as-yet-untested technologies to extract carbon dioxide from the atmosphere, others said.

The point is explicitly made in the Stern Review.Our target, if target there is going to be, should not be any particular temperature nor even level of emissions. It should be the cost of whatever changes we make. This is simply very basic economic reasoning.

If there are to be damages in the future then sure, we should pay some amount now to avert those damages. But obviously, we should not spend more now than what those damages will be: to do so would just be making everyone, present and future, poorer for no very good reason. Thus the most important number we need to know is what is the cost of averting the damage.

To insist that some particular temperature goal, or even emissions number, should be met regardless of the cost of doing so is to invert this reasoning. And given that the original reasoning in Stern (the economic reasoning, whatever one thinks of the climate science underlying the issue) is correct in its logic, this makes setting a temperature or emissions target is just the wrong thing to be doing.

We'd be much more amenable to discussing the climate change issue if everyone wasn't so insistent on applying what we know, absolutely, is the wrong answer to it.

It's great that we've got Dickensian working conditions these days


Felicity Lawrence is trying to tell us, over in The Guardian, that working a pretty bad job in a Sports Direct warehouse is equivalent to Dickensian times. Total nonsense, of course. For the only people asking for another bowl of gruel these days are the Islingtonistas who scoff down the Italian equivalent, that polenta pictured above. That the cheap (and disgusting) sustenance carbohydrate of the masses is now eaten by no one at all other than fashionistas shows us quite how far we've come. However, there's a deeper mistake that she makes:

Sadly, the Sports Direct warehouse is not an aberration. Much of the growth in employment of recent years has been in this field: jobs that in fact represent the death of the real job. The idea that a company’s value and brand is built not just by its owners but by the labour of all its workers has become a lost paternalistic dream. The notion that staff should be rewarded for their part in success with a fair share not just of profit but of security has all but disappeared. The risks of doing business, traditionally carried by capital, have been pushed down to those who can least afford them.

Yes, that's exactly how we want it too. No, not because we're siding with the plutocrats but because anyone at all with the ability to see can note that this last recession was somehow different. Where did all the unemployment go? Given the fall in GDP we would have expected a rise in unemployment to perhaps 4 or 5 million. As many did in fact predict and as did happen (and very much worse) elsewhere. Instead, in the UK, productivity and wages fell.

The answer is at the core of the Keynesian (and New K) analysis. Wages are sticky downwards: thus, in a recession, when labour needs to become cheaper relative to what it produces, we get spikes of unemployment as that's the only way that wages do indeed fall. And this time around this just didn't happen. Incomes took the hit, not employment. The result being that we must conclude that we have a much more flexible labour force, that wages are less sticky downwards.

This is generally thought to be a good thing. In bad times, that all or most lose 5% of their incomes could be, if that's the way you want to look at it (we do), considered to be better than 5% of the people losing their entire incomes. So, that's how the labour market has been rigged. So that it is incomes and wages that take the minor hit, not some subset of the population that take the major unemployment hit.

Profits and capital income also fell, by much more than those labour incomes, so it is shared pain, not entirely loaded on one side or another.

But that is the choice that has to be faced. We either place all the risks of busts on capital, in which case we risk soaring unemployment in such busts, or some part of it is placed upon flexible labour and thus some part of the pain is felt in minor losses of income.

Well, which do you prefer? And you can only choose one of those two, there are no others available to pick from.

An unelected check is better than no check on the House of Commons


Who says politicians are useless and inefficient? They are superbly efficient at one thing, at least – curbing any restraints on their own power. Thus Lord Strathclyde, the Conservative grandee charged by Prime Minister David Cameron with reviewing the role of peers in the governance of the United Kingdom, is set to propose that the Lords lose their veto over delegated or ‘secondary’ legislation. It all stems from the Prime Minister’s (and the Chancellor’s) agitation at the House of Lords blocking plans to cut tax credits. And that was not the first time that the Lords has irritated the House of Commons by questioning its legislative plans.

The argument is that the Commons is elected and the Lords (mostly) isn’t. So the Lords have no right to block Commons legislation. But even the most slavering MP these days would not suggest simply abolishing the Lords and giving the House of Commons absolute power. That would lead to riots. But they figure they can get rid of the ‘problem' a bit at a time. The Lords have already lost their powers to block financial legislation; they can delay but not veto other measures; and the Parliament Act, designed to be used in dire emergencies, is now deployed with dazzling frequency, to push through measures that the Lords feel queasy about.

Lord Strathclyde’s proposals are just the latest sortie in these one-sided air-strikes. Secondary legislation is the detailed regulatory stuff that MPs can’t be bothered with, and delegate to officials: so (runs the argument) why do we need the Lords to worry about that?

Well, we should all worry about it, as we can at least get rid of MPs and even overturn laws, but we can’t vote out regulators. Scrapping regulations ain’t so easy, either. So it is good that such proposals are properly scrutinised before they get going. Give it a year or three, though, and there will be some other issue, and the Lords’ powers will be trimmed again. And again.

Don’t mistake me: there is a lot wrong with the Lords as a legislative chamber (it should be one-eighth of the size, for a start). But it is better to have a crude check on the House of Commons than not. The UK has the most extraordinary ‘constitution’ in which the Executive sits in the House of Commons, and the Commons can vote for anything it wants – including changing the constitution itself (as with devolution – and see where that is getting us). About the only thing that can stop it, apart from the public armed with pitchforks, is the fact that there is a House of Lords standing in the way.

The earliest liberal thinkers on constitutional matters understood the importance of checking power with power. Montesquieu (1689-1755) argued for separate legislative, executive and judicial bodies – and that the legislative branch should comprise two Houses, so one could block the decisions of the other. He was not wrong. Our politicians don’t want to understand this: the worry is that the public and the commentariat don’t seem to grasp it either.

More evidence that the NHS is providing substandard care


Back in April, the Institute of Economic Affairs released a paper that found the UK’s healthcare system to be severely lagging behind neighboring countries. The research, carried out by author Dr Kristian Niemietz, found that social health insurance systems – especially in the Netherlands, Switzerland, and Germany – perform better than the NHS across the board, from the quality of healthcare provided to the heath outcomes of patients. Most shockingly, Niemietz found that “9,000 more deaths occur each year in the UK than would have if the performance of the NHS had matched that of the German system, in terms of avoidable mortality.” Just last week, the IEA released another paper from Niemietz, called Diagnosis: Overrated - An analysis of the structural flaws in the NHS, which highlights the structural flaws and political hindrances that keep the NHS from producing better results:

From the press release:

The NHS’s status as a sacrosanct institution promotes ‘groupthink’ and undermines the ability to detect and correct instances of failure, and to adapt to changing circumstances. This was most immediately evident after the Mid-Staffs scandal.

The idea that ‘we’, the public, run the NHS ‘collectively’ is a popular illusion. Democratic accountability in the system is so vague and roundabout that it is almost meaningless in practice. There is almost zero overlap between the health policies proposed in general election campaigns and those enacted afterwards. The insistence that ‘the people’ are really in charge is empty rhetoric. The health service is run by the political class, senior bureaucrats and the medical establishment.

More specifically, from the paper:

Under a system of meaningful exit options, patients would not just have had the option to bypass Mid Staffordshire, but funding organisations (e.g. health insurers) would also have had the right to withhold payments, given that Mid Staffordshire was clearly not fulfilling its side of the bargain. A pincer movement of this sort might well have bankrupted the hospital, eventually making room for a more suitable provider. That threat of revenue loss and bankruptcy, not ‘democratic accountability’, is what brings providers’ self-interest into line with patients’ interests.

Niemietz’s findings from both April and December are valuable additions to the accumulating evidence that the NHS is in dire need of reform. His research backs up the most recent OECD report, that found the UK’s quality of healthcare to be “poor to mediocre” and its preventative care measures to be “outstandingly poor”.

Unfortunately, most UK politicians seem deeply committed to maintaining the status quo and providing Brits with substandard care. But slowly, evidence is finding its way into the heart of the healthcare debate, and the successes of market-based systems in Europe can't be ignored much longer, as the NHS continues on to its breaking point.

No, no, they're quite right here we really must change business rates


A new report out, insisting that it's landlords, not retailers, who bear the majority of the burden of business rates:

Business rates hurt landlords more than retailers, a new report has claimed, and reducing the burden of the levy could generate 4,000 new jobs and up to £1.75bn-worth of development in the sector over the next five years. Landlords are unable to invest in new real estate as a result, the study claimed, and increases in business rates have led to the country missing out on £670m of new development, and 6,000 fewer jobs over the past three years.

That report is here:

The report, launched today by the British Property Federation, (BPF), British Council of Shopping Centres (BCSC) and British Council for Offices (BCO), written by Regeneris Consulting, has revealed that over a period of two to three years, approximately three quarters of any increase in business rates is transferred to landlords as occupiers push for lower rents.

In other words, business rates limit the rents that landlord are able to charge to their occupiers. This reduces the potential level of new real estate investments that they can make and reduces the amount of new commercial property development. However, not all of the cost of rising rates is passed on to landlords, with approximately 25% being borne by occupiers.

They're entirely right, this is just terrible news. And it's such terrible news that they're also correct in their insistence that we must change the system.

We don't want landlords to carry 75% of the burden of business rates at all, we insist that they should carry 100% of it. We also don't want to tax the value of development at all, just the value of the land which is affected by the other developments around it.

That is, business rates are a crude proxy for a land value tax and as a crude proxy they're not quite good enough. What we want instead is a proper land value tax, one that taxes the undeveloped value of that specific plot of land, that value being determined by all the other development that has taken place around it. What is actually developed upon that plot should not be taxed in the slightest. In that manner the retailer, the occupier, will not be bearing any of the cost of the rates, the developer will not be yet the landlord of the land itself will be carrying the full burden.

Which is how it should be. So, we must thank the landlords for bringing this appalling state of affairs to our attention. They're only carrying 75% of the burden when it should be 100%. Change the system now, revolution!

Business rates: not such a good tax after all


Taxes, eh? Just when you think you’ve found a good one, it lets you down. We usually think of business rates as some of the least bad taxes we’ve got, because to a large extent they’re like land value taxes. Land value taxes are far from perfect but they do less harm than most taxes. For a start, they tend to fall on landowners, rather than land occupiers, because the supply is fixed. Tim Worstall explains this here, and the empirical evidence is quite strong that a £1 rise in rates leads to a nearly-commensurate fall in rents over the long term.

They’re also less distortionary. A good rule of thumb is that if you tax something, you get less of it, which is why taxes on capital are such a bad idea. But since there’s a fixed supply of land, taxing the value of land doesn’t get you less of anything. Nice one.

Unfortunately this might not be how business rates really work, because they tax the value of property rather than land. To a large extent this is a tax on land and that’s all fine and dandy, but you’ll notice that a five star hotel costs more to stay in than the Bates Motel next door, even though the land they’re built on is worth the same. This is because the actual bricks and mortar on top of that land have different values too.

The British Property Federation (and chums) have a new report out today which points out that this might be a serious flaw in business rates. They argue that most landowners have other investments too, and will shift their money from property to those investments when business rates rise:

A rise in business rates will reduce the rents that a landlord is able to achieve and therefore reduce the potential level of new real estate investments by a sum equal to the value of the tax burden transferred from occupiers to landlords business rates … If a proportion of business rate increases are capitalised into lower rents, then there is a likelihood that this will impact on the level of new funded commercial development.

That’s an important point – I’m not sure about the numbers they use, which suggest an extremely high elasticity of investment that I don’t think is justifiable, but it’s still an important point.

Just as important: the less frequently revaluations are done, the more uncertainty there is in the system. Uncertainty is a deadweight loss – it destroys wealth and makes everyone worse off. As we’ve pointed out, it’s not difficult to estimate property values on a rolling basis.

What’s really interesting about this report is not just what it’s saying but who’s saying it. Most industry bodies are woeful on business rates – they wrongly assume that the incidence is on firms because they’re the guys writing the cheques. For the BPF to come out and reject this – and do so with reference to most of the existing academic literature, no less – is very encouraging. But they do have a point about the investment effect.

So, must we throw business rates on the scrapheap too? It depends on the elasticity of investment – how much less money goes on property investment when rents fall after rates rise. And the way to fix things is quite simple: tax the value of the land, not the property that’s built on it.

Stop delaying and expand Heathrow!


To say that rising tensions between Zac Goldsmith and David Cameron could result in a “bust-up” is to exaggerate – I can hardly imagine the London mayoral candidate channeling Eric Joyce and head-butting the Prime Minister – but it’s certainly giving both parties a headache. Earlier this week, Goldsmith announced that it would be an “enormous betrayal” were Cameron to back the expansion of Heathrow airport. The Prime Minister, meanwhile, is dragging his feet in making a final decision between Heathrow and Gatwick. He’s blaming the need for more “confidence building” about the environmental impact of a new runway; really, he wants to remove the issue from next May’s mayoral elections.

The expansion debate is one that has been going on for longer than Goldsmith has been alive. An early plan to expand Heathrow north of the Bath Road was abandoned in 1953; no new full-length runway has been laid down in the South East of England since the 1940s. For years, we’ve been told that Cameron has reached the moment when he must take a decision, but all he’s done is kick the can further along the runway. So what’s another delay, you might ask.

The problem, as William Hague pointed out on Tuesday, is that the longer this debate goes on, the harder it becomes to decide, in an area where the population grows every year. The situation worsens when you consider how painfully slowly UK infrastructure projects get finished. Plans for a railway linking Paddington station to the City of London and the docks were approved by Parliament in the 1880s; Crossrail will only be fully completed in 2019.

Politicians may want to bury their heads in the sand, but Heathrow expansion is inevitable. Boris Island is too expensive; Gatwick is unlikely to provide much of the type of capacity which is most urgently needed: long-haul destination markets. A bigger Heathrow will not inflict noise nuisance on more people than the airport does today, and the people affected would be far better compensated. The Northwest Runway scheme at Heathrow, favoured by the Airports Commission, is technically feasible and does not involve massive, untested infrastructure.

The Confederation of British Industry said on Tuesday that delaying a decision on airport expansion could cost the economy more than £5bn. Personally, I’m with the 31% of MPs who want expansion at both Heathrow and Gatwick. But given that the London airport capacity problem has perplexed successive governments for over half a century, I’d settle just for action on Heathrow.

Ten initiatives to help young people: 10. Young person's business package


  Government should help young people who wish to start up their own businesses by putting together a "young person's business package."  There is unused space at both local and national government level that could be converted into start-up work spaces.  These could be made open plan with desks, computers and wifi, with shared facilities such as toilets and vending machines.  These could be rented very cheaply to people under 25 looking to start a business.

Government could also take an active role in matching young people with mentors from among those who have followed this route successfully themselves.  The business community can be asked to participate, supplying lists of mentors to teams within the Department for Business, Innovation and Skills, who can then match them up to young people starting up a business, in order to provide them with help and guidance.

Finance should be available in the form of loans.  Many start-up businesses require very little initial capital because they tend to grow organically, lifting themselves up by their bootstraps.  But there are stages where some capital is required, and government should join in a scheme with banks and businesses to make it available as loans to start-ups deemed to be sufficiently merit-worthy.

There is considerable evidence that young people are inspired to become entrepreneurs when they are in contact with other entrepreneurs.  Government should work with business to set up a series of school visits by successful entrepreneurs to talk from their own experiences about the nuts and bolts of starting and running one's own business.  Schools should be encouraged to apply for such visits and to make time available for them.

Local governments should be asked to run one-day workshops for young people, with sessions throughout the day on various aspects of entrepreneurship.  These should feature successful people, plus professionals such as tax experts and people with skills in marketing and advertising.  School students should be given time off school to attend them.  The aim would be to impart a thorough grounding into what it takes to launch a successful business, and how to avoid some of the common pitfalls.

The aim of the "young person's business package' should be not only to impart the essential information, but also to motivate people to strive to become successful entrepreneurs.  It is contact with others who are following this path, and with those who have already trodden it successfully, that can do this.


There's silly tax laws and then there's silly ones


No doubt we rather differ among ourselves in our overall estimation of the current Chancellor, George Osborne. But whatever that overall view is it's still possible to point out that not quite everything he does is all that sensible. For there really are silly ideas for taxation:

A senior member of the Government's fiscal watchdog has described George Osborne's raid on big businesses to fund apprenticeships as "a pay cut" for ordinary workers. Stephen Nickell, a member of the Office for Budget Responsibility's (OBR's) leadership team, said the Chancellor's move to raise £11.6bn over the next five years from a new apprenticeship levy served as a payroll tax that would be reflected in lower wages.

Yes, this is so:

"[The apprenticeship levy] is a form of payroll tax [and] in the end the incidence of a payroll tax tends to fall on workers. So in some sense it ends up being a pay cut and it doesn’t have much impact on profits,"

And a cut in wages perhaps isn't quite the thing that we wish to achieve.

Yes, of course, tax revenue needs to come from somewhere but payroll taxes are a really bad place for them to come from. Half or more of the country believes that as the company hands over the cheque then it's the company paying the tax. And as more than half the country likes the idea of someone else paying tax rather than they themselves they think this is just great. But the incidence of a tax does not depend upon who pays it. And payroll taxes almost entirely and always come out of the paycheques of the workers. Thus they're good politics, who suffers being disguised, and bad economics. Because we generally don't think that the workers' wages should be reduced.

Tax things in inelastic supply (land), inelastic demand (tobacco, petrol) and then consumption and, if absolutely necessary, incomes. But silliness like this Apprenticeship Levy really should be avoided.

What exactly is the case for Brexit?


I tend to see myself as an agnostic on the European Union. I’m not a particular fan of anything about it, though I think it does have its qualities. Stopping politicians from throwing up barriers to migration and effectively banning them from renationalizing private industries are both good things, however undemocratic they may be. And I tend to think of the EU as being a force for good for Europe in general, the disastrous euro project notwithstanding. Of course there are huge problems with it as well. It is opaque, difficult to hold accountable and seems to hand down endless new regulations on everything from permitted working hours to olive oil storage. Britain’s legal and political institutions have evolved (and I stress the word evolved) quite separately from most of continental Europe’s, making it perhaps a poor fit with the rest of Europe. And, fundamentally, the EU is one extra layer of government, adding bureaucratic and political inertia to an already sclerotic political process.

But, as an agnostic, I am finding myself baffled and underwhelmed by the arguments currently being floated by “Leave” campaigners. So far, virtually none of them stand up to scrutiny. Unless something changes, I cannot see how these arguments can fly in a proper referendum.

Benefits: The issue of the day, thanks to a row between David Cameron and Donald Tusk that seems to be political theatre. The irrelevance of this was shown (by accident) by Julia Hartley-Brewer in a pro-Brexit piece today:

the argument often given by EU supporters is that very few migrants actually claim these benefits anyway, so it doesn’t really matter. According to the Government’s own figures, EU migrants on “in-work” benefits cost the taxpayer £530m in 2013. Total Government spending is £733 billion this year.

While half a billion quid is not a small number to ordinary taxpayers, it is the principle that matters to most of us. Why should anyone be entitled to come to live in this country and claim welfare benefits without having first made any contribution?

Got that? The £530 million (0.07% of the budget) that we spend on tax credits for Europeans – less than we give to the Arts Council England every year (including Lotto funds) – is a ‘principled’ reason to leave the EU. Never mind that by any decent measure EU immigrants are net contributors to the budget in other respects, or that British citizens receive reciprocal benefits when they work abroad, I suppose. If this is the principle over which we should decide whether to stay or go, count me In.

The balance sheet: Vote Leave say we should stop spending £350 million a week (£18.2bn/year) to Brussels so we can spend that on the NHS or on science fuding.

Well, maybe. Firstly, that number appears to be misleading – it’s a gross figure and doesn’t include the UK’s rebate or other EU grants. When you do include those things, it falls to about £9bn a year. And, as (pro-Brexit) Pete North points out, quite a bit of the remaining money goes on projects we’d want to be involved in whether we were in or out, like Europol and Single European Sky, which coordinates airspace across Europe.

Yes, it also includes disgraces like the Common Agricultural Policy. But it’s hard to believe that any government would have the spine not to just subsidize farmers domestically if we left the EU. And our net contribution to the CAP is quite small anyway – almost as little as we spend on tax credits for Europeans.

Regulation: It’s not difficult to find annoying, wasteful, illiberal regulations that come from the EU. But the question is the counterfactual: if we were out, what would we have instead?

Practically everyone agrees that we’d want, and probably get, a free trade agreement with the EU if we left. But tariffs are not the main barriers to trade between developed nations. The TTIP negotiations underline that – only 10% of the projected benefits will come from abolishing tariffs between the EU and the US. The rest will come from removing regulatory barriers, whether through mutual recognition (we accept US regulations, they accept our regulations) or harmonization. Mutual recognition is preferable, but obviously is only politically viable if each set of regulations is roughly as harmful as the other. If not, one side of the agreement will be outdone on everything by its freer rival.

So what should we expect a UK-EU free trade agreement? At best we can hope for a situation where only British exporters (and their suppliers?) are bound by EU rules; at worst, one where we end up with exactly the same set of rules, only now without any say in how those rules are made. Arguably, these rules are not even really designed at EU level at all.

But even if we get the better end of that stick, who has confidence that a Britain freed from the EU would actually be particularly free market? Maybe we’d lose things like the Working Time Directive, but in the grand scheme of things is there any reason to expect this or any likely alternative government to be any less interventionist than Brussels is? Remember the Red Tape Challenge, or the ‘bonfire of the quangos’ that never was. The counterfactual is just not very encouraging.

The big picture: Perhaps the question is, as Madsen and the pseudonymous WhiteWednesday both say, not about the details at all. They say that it doesn't matter what the reforms secured now are: being in the EU means an inevitable drift towards further centralization and federalism. And the fact on regulation that little would change immediately is a feature of Brexit, not a bug – it takes the risk out of it, and makes reform a long-term project that we can approach on a case-by-case basis, not as the sort of all-or-nothing deal that some others are telling us is on the table.

Perhaps. This does seem to assume a certain degree of inevitability in the European project that is at odds with the idea that the EU, not just the Eurozone, is ready to collapse at any moment. I’m not so sure, and against this I must weigh the possibility that our immigration policy would become a lot more restrictive. For now, the arguments being made by the Leave campaigns just do not cut it.