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.

This rule of law thing is such a pain, isn't it?

There's more than a whiff of a certain totalitarianism here:

If you had told people in the City at the height of the financial crash in 2008 that it would take almost nine years for the first top bankers to face prosecution, few would have believed you. If you had then said that this first prosecution would relate to suspected fraud over one bank’s supposed attempt to avoid nationalisation – rather than the crash itself – the bankers involved in the crisis would have laughed in disbelief: surely, they aren’t going to let us get away with that?

But they did: the bankers who played a central role in the worst crash of the postwar era walked away with their fortunes and freedom intact. Even worse, the fundamentals of the system that made it possible were retained intact.

Jailing all the bankers would not doubt be terribly cathartic. But there is this little thing called the rule of law which we do rather strain mightily to observe. One part of this being that you only get jugged when you have been tried, and found guilty, of doing something which was a crime at the time you did it.

We're starting the process with those Barclay's folks right now. We've done that with people who manipulated Libor. But the bankers in general? What actually is the crime they should be charged with?

Getting it wrong? There but for the grace of God go near all of us. It's not even true that greed, high wages nor incompetence are crimes.

That is, the reason our jails are not packed with bankers is that bankers did not, in general, break the law.

So, the short answer as to why no top banker lost his (they are always men) fortune when their banks went bust and required bailouts or nationalisation? It’s politics. There was too little political capital and almost no political will among mainstream parties to break up the banks and make them small and simple again – let alone to take on the “top” bankers and at least take away the bonuses paid out to reward profits that in 2008 proved illusory.

Most bonuses were paid in stock, stock which plummeted in value. One report has Dick Fulds of Lehman losing $960 million in that manner. Hey, maybe that's not taking away enough money but it's most certainly taking away some, isn't it? 

Further, banks have indeed become smaller and safer, capital requirements are very much higher and so on. And the problem wasn't caused by the complexity of the system either. Northern Rock was a very uncomplicated mortgage lender, Lehman a pure investment bank, HBOS sank on the rock of mortgages again and so on.

It's not even true that small and simple saves banks - America's Depression experience shows that, as does the S&L problems of the 80s.

We have no problem at all with the idea that the system might usefully be reformed. But we do insist that we've got to analyse the problems properly first. The GFC was, properly, a wholesale bank run, an inherent weakness of fractional reserve banking, not something brought about by widespread criminality. Only if we grasp that can we possibly devise solutions.

Two little economic lessons for Dawn Foster

Ms. Foster needs to have a little bit of remedial economics:

Social housing pays for itself

No, it doesn't, quite clearly and quite obviously. It charges less than market rent therefore it must make a loss. To ignore this is to miss one of the two things about economics that even a Guardian writer should manage to get, incentives matter and there are always opportunity costs.

It is the second which is in play here. If social housing were let at full market rent then some amount of money would be rolling in. As it is let at less than market rent less is - the amount not rolling is the loss from the activity.

Note that this is nothing at all to do with whether housing for the poor should be subsidised by the rest of us or not, nor whether social housing is the correct way to do this. We have argued here that all rentals should be market rent and housing benefit used to pay for those who cannot afford it. Precisely upon the grounds that this makes visible the opportunity costs. And when that bill is seen to be the size it is then perhaps we'll all go off and actually solve the problem by blowing up the Town and Country Planning Acts.

But that there are opportunity costs from below market rents is indisputable, it's simply fact. Social housing does not therefore pay for itself.


The problem is not tower blocks, but safety and how willing companies are to risk lives to save money: most buildings won’t have similar fires, but any with similar renovations could.

This is not a feature of companies, this is a feature of our universe. Human desires and wants are unlimited, resources to meet them are scarce. Everything, but everything, is therefore a trade off. We can make cars rather safer by making them tanks that move at 3 mph. That would perhaps not be a good trade off. We could undoubtedly make tower blocks safer at some cost. But that's not the question which needs to be answered. The one that does is how much safer at what cost?

For example, perhaps fire accelerating cladding at the cost of saving on the heating bills isn't all that good an idea? 

This is, of course, just opportunity costs all over again. The price of greater safety is whatever we cannot do as we've used our resources on greater safety.

Please do note that even we don't think that the balance is correct here at present. But we do absolutely insist that we've got to ask the right question before we can have any hope of gaining the right answer. What are we prepared to give up to make those tower blocks how much safer?

The OECD seems to be arguing for more indoctrination

Or at least people are using the OECD report on early years childcare to argue for more indoctrination.

“Give me a child for his first seven years and I will give you the man,” said the Jesuits, though recent developmental work suggests that they would have done better to have got their hooks into him before he was five. Our children are not only most adorable when they are tiny, they are also at their most malleable. They are most sensitive learning about emotional control at one, language and social skills at two, numbers at three. That’s why policymakers, like the Jesuits, long to get at people when they are tiny. That is when governments have their best chance of shaping the country’s future.

And the correct name for that is indeed indoctrination. Get at the little ones and mold them into what the State desires the citizenry be. All very much smacking of New Soviet Man to our ears, where given that state socialism doesn't work with human beings let's try to change the people into something which allows state socialism to work.

It's thus a basic approach which we reject. The aim of the State, whoever runs it and how, is to us to aid and allow us to be ourselves. It is not we who should change to fit the plans, the plans should be devised for us as we are.

That we provide plasticine for 3 year olds to play with while Mummy is at work is just fine. But indoctrination while they do so isn't.

London's Mayor gets something partially right

You may or may not recall this but Ken Livingstone, when Mayor of London (well, sort of, wasn't he?), brought in a policy that we here at the ASI had long championed, the Congestion Charge. And now we see another London Mayor thinking about bringing in a further policy which we have equally championed, pay per mile driving

London is to consider pay-per-mile road pricing and banning car parking in new developments under plans to cut 3m car journeys a day in the capital. 

A transport strategy to be published on Wednesday by the London mayor, Sadiq Khan, will set targets to ensure 80% of journeys are made by public transport, walking or cycling.

Khan said: “As London’s population is set to increase beyond 10 million, our future health and prosperity is more and more dependent on us reducing our reliance on cars.

“We have to be ambitious in changing how our city works. While there will be 5m additional journeys being made across our transport network by 2041, at the same time we’re setting ourselves a bold target of reducing car journeys by 3m every day.

Of course, much of this is barking inanity. Having a target for the number of journeys is simply nonsense. Set the basic rules and then leave people be to sort it out themselves by responding to the incentives.

But the basic idea of the charging per mile driven is entirely correct. We've a scarce resource, road space. We need to design some method of allocation of that scarce resource. And resource allocation is almost always best done by price. Thus, charge people for use of the scarce resource.

Space on the Embankment at 4 am is not scarce so there need to be charge. Space in the same place at 4 pm is scarce and thus a charge should be made. Technology has moved on since the original Congestion Charge so we are indeed able to bring in a more fine grained solution.

We're not, as we've noted, enamoured with the ideas of targets and so on. But the basic underlying concept is indeed correct. Charge people the correct price for a scarce resource and the correct amount of said resource will be used.

We're really not sure about this you know, really not sure

We're as fond of the white hot heat of the technological revolution as the next person but we're really not sure about this:

Avocados with laser-printed barcodes are going on sale at M&S as part of a drive to reduce paper waste.

The labels, which are etched onto fruit's skin with lasers instead of stickers, will save 10 tonnes of paper and five tonnes of glue every year according to M&S.

If that's what a business wants to do then let them get on with it of course. But there's at least the possibility that this isn't such a good idea. Paper seems to be about $1,000 a tonne, glue perhaps $2,000. So we're talking about a saving of $20,000, which is what, £15,000 a year?"

Sustainability is at the heart of our business and the laser labelling is a brilliant way for us to reduce packaging and energy use."


"We have the potential to reduce packaging exponentially which is very exciting."

There is just a hint of a soupcon of a suspicion here that we're not being entirely rational. Using fewer resources to achieve the same task is obviously delightful, it's the process also known as "making us all richer" because we can then do another thing as well with those resources so saved. But that soupcon, there's a possibility that we've reified packaging and the use of less of it. It's seen as something indubitably good, when in fact it should be a rational calculation each time. 

It isn't true that "less packaging" is a good thing, it depends, but that's just not how the public belief seems to be going, is it?

New ASI paper: How the UK can be a world leader in medical innovation

The ASI has a new paper out today by Mark Lutter: Instrumental Variables: How the UK can become a world leader in medical innovation.

Lutter argues that the UK must reduce the restrictions on developing new drugs and medical treatments by building a culture and regulatory structure designed around "permissionless innovation"—innovate first, regulate later. People do not just suffer and die from faulty drugs, but also from good drugs being permitted too late. He suggests "reciprocity"—allowing devices and procedures in the UK if they are already permitted in some other highly developed country with similar regulatory standards—as a first step.

Here's the pdf of the whole paper. Here's the PR for the paper.

Here's Marks' twitter, his essays on private governance at Cato Unbound, his page on FEE, his Medium page, and his page at NeWAY Capital, where he's currently employed.

Governing to win

As Madsen wrote last week, the election was a close run thing. We've been spared a Corbyn premiership, for now. But my fear is that this ends up being a repeat of 1992–97, where five years of paralysis lead to a landslide defeat. Only, this time, it's not Tony Blair but Jeremy Corbyn who gets the massive majority.

No thanks. In today's City AM I outline an agenda for whoever replaces Theresa May to avoid that. It's crucial that her successor uses this time in government to do things that voters will reward them for when the next election comes around, and offers them a manifesto worth showing up for:

As for the next manifesto, focus on policies that have worked elsewhere.

Let local government issue municipal bonds for investment, as in Australia and the US; create a legal framework for long-term leases as in Germany; bring in Japanese-style track-and-train integration of the railways; copy Scandinavian models of childcare, which are much more affordable and less prescriptive than our own.

And show some compassion. Make Britain the most open market on earth for exporters from poor countries; give us the most humane animal welfare standards for food and farming in the world; immediately and unilaterally guarantee EU citizens’ rights; ditch the parochial and misguided migration cap.

Read the whole thing here.

The Daily Mail celebrates their campaign to make us all poorer

The Daily Mail proudly announces that their campaign to get more disposable coffee cups recycled has borne fruit. A new and lovely scheme to recycle more of them has been created. 

Or, as we might more accurately describe it, the Daily Mail's campaign to make us all poorer has succeeded.

Millions of throw away coffee cups will be recycled rather than sent to landfill sites or incinerators under a new service.

Employers will be encouraged to install dedicated bins in workplaces so that cups can be sent to specialist centres.

The Daily Mail’s Curb The Cups campaign highlighted last year how most disposable cups cannot be recycled because they have a plastic coating inside.

As we've noted many a time before, we've nothing against recycling per se, one of us made a living for some years organising profitable such activities. We do, however, object to recycling which makes us poorer. And this does, as we've also pointed out, apply to these coffee cups, recycling them instead of throwing them in a hole in the ground makes us poorer:

The programme does not make a profit. Those who offer up coffee cups for recycling must pay extra to do so. This is on top of the normal waste disposal fees and yes, even on top of the normal landfill tax already charged. The programme is unprofitable and thus makes us all poorer.

And note what the meaning of that is. We are spending more of our scarce resources by recycling than we would by not recycling. We are wasting resources to save them.

Another way to describe this is flat out idiocy but then that's the modern world for you with the mantra about recycling. It's the latest mass delusion to have taken hold of society.

As we'v also pointed out we've a very useful little system to calculate all of this for us:

But the logic also works the other way around. If we can work out the tax we’d have to impose to stop people doing something, and compare that to the actual costs being imposed by their doing it, we can work out whether the benefit is higher than the cost. And we can indeed do that. We know that the tax must be more than £625 million a year to stop this plague of using disposable coffee cups.

I’m told that one medium cup a day for a year amounts to some 5 kg of waste. As the report tells us there are 7 million cups used each day, so that is 35,000 tonnes of waste a year. And we know what the cost of a tonne of landfill waste is. We’ve got a Pigou Tax on it: it’s £83 per tonne these days. The annual cost of chucking those paper cups into landfill is therefore just under £3 million. And there’s not a chance Government is under-taxing us on this, is there?

The environmental cost to society of disposable coffee cups is thus £3 million a year. The benefits to the population are north of £625 million a year.

It is not necessary that we like the answer which the price system delivers to us but it is indeed vital that we understand it. Even when we add up all of the environmental costs of not doing so the recycling of coffee cups makes us poorer. Given that becoming poorer is not a known aim of socio-economic policy therefore we shouldn't recycle coffee cups.

But, you know, the Daily Mail gets its teeth into a misunderstanding of the issue and we all become poorer.