Counterfactuals matter

Alex Tabarrok at Marginal Revolution has a really great post on car safety in India, which illustrates a major problem with attempts by government to protect consumers by regulating unsafe products out of existence.

According to the Global New Car Assessment Program, 5 out of 7 new cars made for the Indian market lacked airbags and would fail basic UN crash tests. Tabarrok quotes Global NCAP Secretary General David Ward "Global NCAP strongly believes that no manufacturer anywhere in the world should be developing new models that are so clearly sub-standard".

But demonstrating that a product is unsafe is not sufficient to show that regulating it would make people safer. As Tabarrok shows, counterfactuals matter:

Let’s take a closer look. These cars are very inexpensive. A Renault Kwid, for example, can be had for under $4000. In the Indian market these cars are competing against motorcycles. Only 6 percent of Indian households own a car but 47% own a motorcycle. Overall, there are more than five times as many motorcycles as cars in India.
Motorcycles are also much more dangerous than cars.
The GNCAP worries that some Indian cars don’t have airbags but forgets that no Indian motorcycles have airbags. Even a zero-star car is much safer than a motorcycle. Air bags cost about $200-$400 (somewhat older estimates here a, b, c) and are not terribly effective. (Levitt and Porter, for example, calculated that air bags saved 550 lives in 1997 compared to 15,000 lives saved by seatbelts.) At $250, airbags would increase the cost of a $5,000 car by 5%. A higher price for automobiles would reduce the number of relatively safe automobiles and increase the number of relatively dangerous motorcycles and thus an air bag requirement could result in more traffic fatalities.

Substitution effects are basic economics, but regulators often ignore the fact that consumers responding to incentives will switch to cheaper and often (less safer) alternatives.

Take the European Union's recent Tobacco Products Directive:

Cartridges and tanks of e-liquid will be limited to 2ml, a incredibly small amount, and refill containers to 10ml, completely preventing bulk-buying and outlawing the products users find most convenient. The maximum strength will be 20mg, ruling out high strength varieties that most closely approximate cigarettes.

The regulators who drafted this law hope to see the public's health improve as vapers switch to safer, lower strength E-Cigarettes, but it could very likely have the opposite effect. As E-Cigarettes, which are 95-99% safer than traditional cigarettes, become weaker and less convenient, consumers have less of an incentive to switch from tobacco to e-liquids. 

Likewise, attempts to improve public safety by banning low-risk tobacco products like Snus have backfired spectacularly.

Or take for instance, Austin, Texas. Its City Council imposed onerous regulations on private ridesharing companies like Uber and Lyft with the stated aim of protecting the public from unsavoury drivers. One of the key sticking points was a finger-print background check requirement that went far beyond what was expected for standard Yellow Cabs.

Uber and Lyft responded by going Galt. They left Austin altogether. What happened next shouldn't surprise anyone. The Drive reports:

Though the city frightened voters with terrifying depictions of a plague of Uber-rape, it’s now come out that people with sexual assault convictions, and even drunk-driving arrests, are actually allowed to drive cabs in Austin, few questions asked. "If you have ever been convicted of theft at any point, you could never get a chauffeur's permit,” a city council member told a local news station. “That just seems like too much.”
Then there are the opportunists who are actually thriving. I talked to one driver who seemed to be enjoying himself in this bizarre ecosystem of random auto-barter. Because of his “local media presence and history of bartending in the city,” he immediately scored an under-the-table gig providing two to three rides a day to executives from a prominent entertainment company, as well as whatever else he could cadge up on Facebook.

Attempts by government to protect the consumer too often fail to consider the counterfactual, if policymakers and regulators took substitution effects seriously, many regulations wouldn't see the light of day.

Fighting for control of our purse strings

The UK’s Crown Prosecution Service says that a new law is needed to stop terrorists and other criminals using Bitcoin-style digital payments for illicit purposes such as money laundering.

Really? We have more than enough laws already, and a quick way to cut crime would be to scrap two-thirds of them, but that’s another story. But the thinking behind this particular proposal is clear: our authorities feel that, because of technical innovation, they are losing control of money, and want to reassert it. Hence all the dire talk to bolster this new power grab. "Shock horror: Drugs are being traded on the ‘dark web’” – that sort of thing. Of course, if drugs were legal (even if regulated, like alcohol) this would not be a problem. (Yet another story.)

But the CPS proposal is another thin-end-of-the-wedge issue. Sure, we all want a way of dispossessing scumbags who pile up secret funds to finance terrorism or to conceal gains from fraud and corruption. But should the authorities be allowed to barge into everyone’s accounts, Bitcoin or regular, as they please, or on some fishing trip, or on the allegations of someone with a grudge? No.

In the early days, many authorities wanted to close down Bitcoin and other digital payments entirely. Again, the excuse was that criminals would use them. Pardon? Since most of the world’s crime is done in regular currencies, that arguments would put the entire boards of the Federal Reserve, the Bank of England and the European Central Bank in the slammer. A neat idea, but not exactly justice.

I remember decades ago, before cellphones and stuff, when Citizens Band radio came out – to the delight of long distance lorry drivers, who could not talk to friends while on the road (and warn others of police patrols). There were appeals to ban it in Parliament, on the grounds that criminals could use it to plot robberies (I’m not making this up). Well, we might as well have abolished telephones and letters (and while at it, heliograph or any other communication device). Again, it was fear of the technologically new.

The Feds say they have cracked the iPhone codes, though MI6 boffins still seem to be scratching their heads. Again, there have been demands to open up the codes so the authorities can snoop at will. Do we really think their snooping will stop at bad guys? Or will junior officials just not be able to resist prying into the text messages of a few celebs that the Sunday tabloids have interest in?

Apple was right to resist the Feds’ legal challenge, on the grounds that people’s privacy and people’s security are intimately bound up and too important to be given over to government politicians and officials. I think the same is true with money, of any kind. One of the joys of cash is that we can use it without the government keeping a track of our spending: after all, control people’s spending and you control their lives. Let’s keep it a private and secure as we possibly can.

Can you trust Treasury forecasts when they struggle with basic arithmetic?

The Treasury are playing a key role in the referendum campaign. They have published two reports which explicitly campaign for remain. The first looked at the long term impact. The second report published yesterday, looks at the immediate impact. Both reports are all doom and gloom. They claim our economy will quickly be pushed into a recession and we will be £4,300 poorer in the long term.

Like the Government’s referendum leaflet (which cost £9m to publish), this analysis isn’t balanced. It is openly designed to promote Project Fear. It also cost taxpayers’ money to produce. Civil service staff are being diverted to fight the remain campaign. These are vast resources which aren’t at the disposal of the other side, essentially circumventing the funding limits. A team of 20 treasury wonks would cost around £1m a year. 

Experts often make errors. From Corbyn’s recent election as Labour Leader, to the 2015 Tory majority or 2007-8 financial crisis – the establishment often get predictions horribly wrong. Philip Tetlock, a professor of political science at the Wharton School of Business is one of the world experts on forecasting. From 1984 to 2003 he tested 284 experts from government, economics and wider academia. On the 28,000 predictions they made, they were "roughly as accurate as a dart-throwing chimpanzee". We have little reason to believe the Treasury predictions are any better.

As a concerned taxpayer, I submitted an FOI request to the Treasury. We have a right to know how much this all costs. I asked them how much they are spending on the EU referendum and in particular for staffing numbers. Their (late) reply speaks for itself. 

“It is not possible to identify full time equivalent staff numbers involved in the production of HM Treasury’s analysis because of the range of staff who contributed on an ad-hoc basis from across the Department. We have not yet received the publication invoice.” Information Rights Unit, HM Treasury.

It is not possible to count up the team involved. But it is possible to predict the next 30 years to the nearest pounds and pence, complete multivariate macroeconomic modelling, and work together as a pan department team to quickly turn this around into 290 pages of reports. Either they can't do basic arithmetic or they are hiding the amount they are throwing at the campaign.

Naturally I have asked for a review, and will be writing to the information commissioner in due course. Having worked for the government in various forms, I know that they have this basic data. If the number is so great as to defy a count, they could ask HR.

Whilst people may have provided support on an ad-hoc basis, this is true of most organisations, projects and reports. They could still count the number of authors and core team members involved. They could even estimate the wider support. If the treasury is incapable of approximating the number of staff involved in an internal project, what can be said for assumptions used in their reports?

290 page reports aren’t conjured out of thin air, a team would have been created, or existing teams would have taken on the task. Often departments have to approve a business case and set aside funding before diverting resources to a major project. 

The Treasury’s forecasts have been criticised from many angles – their poor forecasting record (consistently missing borrowing targets), use of fishy assumptions, focus on grabbing headlines and use as ‘independent statistics’ whilst being instructed by a biased government. Either way, the public has a right to know the facts, including how much taxpayers’ money is being spent on promoting remain.

More Government meddling in the railways

Last week was a mixed week for competition in the railway industry. On Thursday 12 May the government’s Office of Rail and Road (ORR) made its decision on applications from three different operators for new services on the East Coast Main Line (ECML). Shortly after that, the Competition and Markets Authority warned new Northern rail franchise operator Arriva that they were investigating 44 cases where the franchise duplicates the company’s existing bus routes. The two stories combine to paint an interesting picture of struggling competition in one of Britain’s most heavily over-regulated industries.

Britain’s franchised rail system is often referred to as being privatised, but little could be further from the truth. Most services are set out in government franchise specifications, with operators winning contracts with obligations to provide services over a network of routes at given frequencies. The infrastructure they run on is owned by the virtually public Network Rail, whose permission is required in order for operators to launch any new services beyond those set out in the original specification. 

However there is another class of operator alongside the specified franchises. Open access operators, as they are known, propose completely new services outside the franchised system. Although countless proposals have been made, only two such operators currently run long-distance services on the British rail network: First Hull Trains and Grand Central. 

Both of these provide services from London along the ECML to new destinations away from those served by the East Coast franchise. Stops on the main line are limited to a few major interchange points, due to the fact that open access applications are judged in part by how much revenue they abstract from the franchised operators. On a network privatised to introduce the benefits of competition, applications have been repeatedly refused precisely because they would cause competition.

Latterly the ECML has been subject to a number of new applications. First Group and Grand Central owners Alliance Rail both wanted to introduce new London-Edinburgh services in competition with incumbent franchisee Virgin Trains, with Alliance also applying for new routes to Cleethorpes and West Yorkshire. Virgin had a host of new services they sought to add to those required by the franchise, including extra Edinburgh trains and new routes to Harrogate and Lincoln. 

The ORR elected to approve all of the proposals made by Virgin, while dismissing Alliance Rail’s extensive plans on the grounds of value for money and revenue abstraction. First Group’s limited proposal of five trains a day from London to Edinburgh was approved, but not without concern over its effect on the Virgin franchise. 

The decisions made here seem curious and inconsistent. While Virgin’s new services to Lincoln and Harrogate connect those cities to London and the south, Alliance’s similar services to West Yorkshire and Cleethorpes are rejected for revenue abstraction and the cost of providing new infrastructure for tilting trains, despite the clear benefits brought to these communities. 

Meanwhile Virgin’s extra Edinburgh services seem to deliver little in comparison to Alliance’s proposal, which would have cut the journey time between the two capitals. First’s approved proposal creates a kind of budget train, a single-class low-fare alternative more likely to attract passengers from coaches and airlines than from the competing rail service.

Competition between different modes of transport is always going to exist in any system, and the unrelated decision by the Competition and Markets Authority on the same day to investigate monopolisation of routes between Arriva buses and the new Arriva Rail Northern franchise is even more irregular. 

Rail franchises and buses have been run by the same operator on the same corridors in countless cases before, such as the entire section of the Midland Main Line from Luton to Leicester, without drawing any attention from the CMA. Furthermore, these concerns should have been brought up during the awarding of the franchise, not after its commencement.

Both of these announcements highlight how the rail franchising system is a disjointed mess of conflicting regulation, and the benefits envisioned in the 1992 privatisation plan have been all but lost under overpowering government control and intervention. 

With a return to nationalisation clearly offering no real prospect of change in what is already a heavily regulated industry, it seems the better option would be to move towards a deregulated approach, with open access services coming first. Operators could compete on the busy corridors and respond to passenger demand, leaving government, or preferably local authorities, to contract only those essential services left unprovided. Only then would true competition be possible. Only then would the needs of the passenger come before the needs of the state.

Apply now for the 2016/17 John Blundell Studentships

Applications for this year's John Blundell Studentships are now open. These are grants for students starting or continuing postgraduate research at a UK university in the 2016/17 academic year, who have themselves made a tangible contribution to the classical liberal movement and whose work will help to further the cause of classical liberalism around the world.

Full details are here. Applications close at midnight on Saturday June 18th, 2016. 

Was the tulip bubble really a bubble?

I'm a bubble sceptic. Pretty much every time I see someone claim something is a bubble, I disagree. To begin with, the model is sketchy. You only need a decent amount of rational money to drive out the irrational money—and in practice people just don't make money beating the market.

On top of that, most of the instances people claim as examples are dubious. I don't think the tech bubble was a bubble. I don't think the housing bubble is a bubble. I think that a lot of departures from the efficient markets hypothesis are driven by legitimate factors.

But even I thought that some examples in history were "true bubbles"—though I hadn't researched them. Well it turns out that even the south sea 'bubble' and the tulip 'bubble' may not have been bubbles—at least according to a book reviewed for the Journal of Political Economy by John Cochrane in 2001 (pdf). This is because prices were not prices in regular terms, and often represented options, or derivatives, or effectively bets.

1. Tulip speculation used futures contracts, which were illegal. The threat of being excluded from trading was sufficient to get people to pay for small losses, but buyers of futures contracts could and did default on large losses, with backing by the courts.
2. Buyers paid only one-twentieth of each contract price up to a maximum of 3 guilders.
3. The main evidence for a bubble in the classic stories consists of very high prices paid for specific rare bulbs in the winter of 1637, prices hundreds or thousands of times higher than prices for those bulbs years or decades later. (There are no price data immediately after the crash.) Garber documents that other rare tulip varieties continued to command high prices long after the mania, even to the present day, and that "bulb prices decline fast: it is their nature." The first bulb captures the present value of its offspring. Prices then decline rapidly as the supply expands, and newer varieties still are introduced.
4. There was a fundamental shock: "In France, it became fashionable for women to array quantities of fresh tulips at the tops of their gowns. Wealthy men competed to present the most exotic flowers to eligible women, thereby driving up the demand for rare flowers. Munting (1696, 911) claims that at the time of the speculation a single flower of a particular broken tulip was sold for 1000 guilders in Paris. This was a final demand price for a consumption good and not the [speculative] asset price of the bulb."
5. The myth tells of a large inflow of foreign money, lending to speculate in tulips, and economic distress after the crash. There is no evidence for these parts of the story, especially (and most importantly) the last. Shares in the Dutch East India Company rose from 229 in March 1636 to 412 in 1639. 

The whole paper is extremely readable, and reaffirms my belief that just-so stories of irrationality and 'behavioural' behaviour are very often untrue in equilibrium.

David Cameron made much of the Queen’s Speech being the agenda for a ‘Progressive, One-Nation Conservative Government’. But what does that mean?


Political ‘progressivism’ is a difficult concept to pin down. It began around the end of the nineteenth century, and advocated the application of ‘scientific’ principles to social affairs. Scientific method had produced great improvements in our understanding of the physical world, leading to rapid material progress. The progressive insisted that this physical progress was vital to the improvement of the human condition. And they further believed that the ‘scientific’ management of society would advance social and economic progress still further.

Progressive Conservatism tries to introduce such interventionist ideas (expressed largely in income redistribution and economic planning) into the paternalist but otherwise anti-interventionist Conservative mainstream. This by itself is a difficult balancing act. And authors from Adam Smith through Ludwig von Mises to F A Hayek have highlighted the unintended consequences of interventionism, noting the limits of our ability to understand society and make it do what we want. So Progressive Conservatism is both a tricky and potentially forlorn approach.

‘One Nation Conservatism’ is easier to pin down. It goes back to Benjamin Disraeli, whom David Cameron has cited as his favourite Conservative leader. Disraeli coined it round about 1845 as a warning against Britain becoming two ‘nations’ – rich and poor. Based on the idea that society was organic and that the different classes had social obligations to each other – particularly that the upper classes had an obligation to those below – it was a brilliant PR move. It at once suggested to the working classes that they could rely on Conservative paternalism, and that Disraeli’s Liberal opponents were selfish individuals who did not regard themselves as having any such obligation.

By the end of the nineteenth century, the Conservative Party had become more free-market and less interventionist, but after the depression era of the 1930s, and particularly after the Conservatives’ defeat by the radical postwar Atlee government, the One Nation phrase began to be used much more; so much so that people talked of a ‘postwar consensus’ between Labour and Conservative political movements. And more recently, after Margaret Thatcher’s more free-market policies were replaced by the dominant centralism of Tony Blair, the phrase has come back as the Prime Minister’s new watchword.

There is, however, a difference between these modern usages and Disraeli’s. Both agree that the rich have a duty to the poor. Disraeli regarded this a largely a duty of individuals to individuals. Given the expansion of government today, it has instead come to mean a duty of taxpayers to beneficiaries. Disraeli’s idea, that the better off should willingly be generous and honourable to others and ensure their equal treatment under the law, has morphed into the idea that the better off should be forced to pay higher taxes for the benefit of others, which of course treats people very differently under the law. It replaces the idea of an organic society that prompts natural interpersonal obligations, with the idea of a politically designed society whose leaders impose political and financial obligations on particular groups (of their choosing), to support (in ways of their choosing) other groups (of their choosing). Indeed, even to use Disraeli’s phrase (or even ‘Progressive’ and ‘Conservative’) for this seems to stretch the language beyond endurance.

If the NHS is so good then we should be spending less than everyone else

If the NHS is so good then we should be spending less than everyone else

Reason rather flies out the window when discussing the NHS, that Wonder of the World that it is. Yet we do rathre insist that we must retain that very reason when discussing it. For if the structure of the NHS, that idea of not just government financing but direct government provision of health care, is so good and wondrous then we should be spending less upon it than everyone else: