The EU’s pro-cancer tax policy


If there’s anything the EU does well, it’s petty bureaucratic interference that worsens the problem it’s purporting to fix. It was, then, probably a mere matter of time before this approach would lead them to blunder towards e-cigarettes and propose policies that, effectively, promote cancer. The EU is making moves towards increasing tax on e-cigarettes by classifying them as a tobacco product and setting a minimum excise duty. This will, of course, lead to the price of e-cigarettes significantly increasing.

The logic appears to be that smoking is a demerit good that harms the consumer and imposes third party costs. Given the market fails to factor this into the price, the government steps in and places a ‘sin tax’ on the good, in order to discourage its harmful consumption.

Regardless of your views on the effectiveness or desirability of these policies with regards to smoking, there is a small problem with treating e-cigarettes the same way. They do not contain tobacco. Vaping, whatever its risks and flaws, is not smoking. In fact, most vapers use e-cigarettes as a substitute in order to give up smoking, with almost one million doing so successfully.

Whilst largely motivated by the (comparatively) lower risks of inhaling nicotine without tobacco, the considerably lower price of e-cigarettes is another major attraction (the smoother feel, the better taste, and the less unpleasant smell don’t hurt either). Anyone familiar with basic economics understands that raising the price of a product will make more people buy a substitute instead. In the case of smoking, which is more than a little habit forming, this is even more likely to lead people to stick with their established habit rather than switching to the alternative.

It is true that the risks of vaping are not yet fully known. However, the research that has been done indicates that it is 95% healthier than smoking. And, in any case, punitive taxation and crushing regulation can only be justified when the cost of intervention is outweighed by the activity’s perceived cost to third parties. It is arguable that this standard has been met for tobacco. It is absurd to think it applies to vaping.

The motivation for this move is probably the tax revenue that EU Member States fear they will lose if people switch from tobacco to vaping. This seems a poor excuse for imposing a policy that effectively protects carcinogenic products from competition. This also appears to be an incredibly misguided move in the build-up to the Brexit referendum.

Property rights work—even in fish


In theory, it's hard to set up property rights systems over many goods. A classic example is fish in the sea. Usually property rights involve stuff that stays put or whose movement you can control. But dividing up the ocean would be unimaginably difficult and hardly desirable even if we could do it. And fish will swim around.

So it would seem that it's pretty hard to have property rights over fish—who's to say that this fish is mine or yours? When a fish swims into my plot of sea does it become mine, or is it still yours because it came from your plot of sea?

Of course, laws have got around these simplistic problems, and given fishermen "individual transferrable quotas"—each of them are only permitted to bring back a certain number of fish (details explained well here). It encourages efficiency, because if someone else can haul in your take cheaper than you, you can sell your right to them. But unlike a total quota, there's no race to bring in as many as possible in as short as possible a time.

This system has done pretty well at preventing stock collapses and has been emulated in Alaska, New Zealand and elsewhere. But it may have another benefit, according to a new paper by Lisa Pfeiffer and Trevor Gratz: reducing fisherman risk-taking:

Commercial fishing is a dangerous occupation despite decades of regulatory initiatives aimed at making it safer. We posit that the individual allocation of fishing quota can improve safety by solving many of the problems associated with the competitive race to fish, which manifest themselves in risky behavior such as fishing in poor weather. We present a previously unidentified approach to evaluation: estimating the change in the propensity to start a fishing trip in poor weather conditions as a result of the management change. We chronicle a revolution in risk-taking behavior by fishermen (a 79% decrease in the annual average rate of fishing on high wind days) that is due to the change in economic incentives provided by rights-based management.

So that's another win for property rights then!

Trying to judge today's trade by the old rules


We have to admit that we quite like the mental image this conjures up:

The idea of buccaneer Britain trading freely outside the EU is a fantasy

Avast ye scurvy swabs and buy moi foine products!

Yes, yes, and given that one of us just dubbed a pirate's voice for a computer game, thrice yes. However, there is a slight fault in the argument being put forward here about trade:

The first is distance. Imagine if all of Britain's trade agreements were suddenly erased from history, and we had to restart our negotiations from scratch. Our first priority would be to reduce the cost of trade with big, nearby economies. Trade diminishes quite rapidly with distance: half of Britain’s exports go to the EU, which makes up a fifth of the world economy. Meanwhile, the non-European members of the OECD – although they comprise a third of the global economy – only buy a quarter of Britain’s exports, because on average, they are seven times further away.

This very definitely used to be true: the costs of trade were dominated by the simple transport costs of doing that trade. Given the general path dependency we see in the economy it's not all that surprising that the pattern persists. However, this is no longer true of new trade as a result of an invention made back in the 1950s: the shipping container.Certainly, it has taken a few decades to really work through the global economy but the costs of trade now are almost entirely divorced from simple physical distance. If you're on the container network then it costs something under $5,000 to ship 36 tonnes of anything anywhere. If you're not on that network then it is many multiples of that price.

More, a significant portion of that price is organisation, pick up and delivery, the container itself. The actual distance to be traveled doesn't make all that much difference. In this sense, in this transport sense, Chicago is as close to Coventry in geographic terms as Caligari is, as Cologne is. Not entirely you understand, but pretty much so.

The European Union idea, that we should be encouraging trade between close geographic neighbours even to the point of discouraging more long distance routes is a little like the work of the Reverend Malthus. Entirely true until the very date that someone sat down to write it all out. Traditional geography did matter and the system was designed to account for that. But that first container ship set sail 6 months before the Treaty of Rome was signed. The structures of trade based upon geographic proximity were thus being invalidated by the new technology at the very moment that policy tried to enact policies for that geographic proximity.

It has been true that, and current trading patterns still echo that it was true that, geographic proximity was important in trade. The actual distance traveled now is of near no importance at all. The world has changed since we set the rules, you see?

Larry Summers and the Donald Trump problem


This may or may not surprise you but we can't say that we're overly keen on Donald Trump. A Great National Upchuck against the standard ruling classes and Beltway Bandits, yes, that has its amusement and joy to it. But the specific beneficiary not quite so much. What won't surprise you at all is that Larry Summers is just horrified:

While comparisons between Donald Trump and Mussolini or Hitler are overwrought, Trump’s rise does illustrate how democratic processes can lose their way and turn dangerously toxic when there is intense economic frustration and widespread apprehension about the future.

We tend to think it's more frustration about the past or the present ourselves. Something of a rage at the way ion which whoever gets voted in it always seems to be the same government in power. But that's not our point here:

The possible election of Donald Trump as President is the greatest present threat to the prosperity and security of the United States. I have had a strong point of view on each of the last ten presidential elections, but never before had I feared that what I regarded as the wrong outcome would in the long sweep of history risk grave damage to the American project.

The problem is not with Trump’s policies, though they are wacky in the few areas where they are not indecipherable. It is that he is running as modern day man on a horseback—demagogically offering the power of his personality as a magic solution to all problems—and making clear that he is prepared to run roughshod over anything or anyone who stands in his way.

Summers goes on to give examples none of which please us any more than they do him. But again we would identify the real problem as being much more basic.

That is the expansion of Federal power over the decades. for those who believe in the power of government to fix all ills it is of course obvious that government should have more power to fix said ills. But democracies do indeed elect oddities from time to time and a useful rule of thumb is that you should never grant a power to an office that your worst enemy might be occupying in a year or seven hence.

But that is of course what the liberals and progressives have done over these past decades. Ever more power is concentrated in Washington DC, ever more in the executive and this produces conniption fits when there's even a possibility that "not one of us" might end up occupying the Oval Office. The correct solution to this, given that not one of us is inevitably, over the course of time, going to achieve that office is not to give it that power in the first place.

If the Federal Government was the size it should be, back down to the 4 to 6% of GDP that the Founders thought it should be, with executive powers to match, then who would care very much about who got elected?

The same of course applies to our own polity. Various left wingers (including, obviously, the author of The Courageous State) insist that government should have more power to do whatever. Which could even be true but they are missing the vital point that if we have a government with those powers the Tories will get in one day and enjoy those same powers.

Donald Trump is this year's argument for minarchism.

Cut taxes, get money

It’s true: when you cut top tax rates, the rich pay more. UK Chancellor of the Exchequer George Osborne reports that his 2012 cut in the 50p-in-the-pound rate for top earners – to 45p – brought in an extra £8bn of revenue from those earning more than £150,000. It’s a prime example of the Laffer Curve (named after the economist Arthur Laffer): if you tax people beyond endurance, they will – one way or another – thwart you and pay less tax. And we have seen it all before, many times. In 1979 Chancellor Geoffrey Howe cut the UK's top rate of income tax from 83% (!) to 60%, Before the cut, the top 1% of taxpayers paid only 11% of the total take. By 1988 they were paying 14% of the total take. His successor Nigel Lawson cut top rates even more, from 60% to 40%, and receipts rose further. By 1997, the top 1% of earners paid a huge 21% of the total tax take.

Over in America, President Calvin Coolidge slashed top taxes too. As a result, revenues nearly doubled, and the share paid by $100,000+ earners rose from 28% in 1921 to 51% in 1925. Of course, top rates climbed again, but in the 1960s, President Kennedy slashed the highest rate from 91% (!) to 70%. As a result, the share paid by $50,000+ earners rose from 12% in 1963 to 15% in 1966, and total tax revenue grew from $69bn in 1964 to $96bn in 1968. Then in 1981, President Reagan introduced the largest tax cut in US history, cutting all taxes, and slashing top rates from 70% to 50%. In 1981, the top 1% of earners paid 18% of the tax take, but by 1988 they were paying 28%. President George H W Bush raised top taxes to help close the deficit: his move had exactly the opposite effect. But when George W Bush cut taxes, the economy powered ahead, and the tax take from million-dollar earners doubled from $132bn to $273bn in just two years.

It is a pity that, in 2012, George Osborne did not cut the top rate of tax from 50% to 40% – or even less – as we at the Adam Smith Institute advised him to do. He was still not confident enough to take on fully the ‘tax the rich’ arguments so deeply rooted in the psychology of envy. But the rich these days do not get rich from inheritance any more – check the Sunday Times Rich List to see that – they get it from building businesses that create jobs, customer value, and prosperity. A bolder cut would have raised even more revenue that enabled him to cut the deficit, and stimulated economic growth at the same time. Let’s hope he follows the evidence in his forthcoming Budget.

Understanding why the press is generally pro-Brexit


That the British press is generally pro-Brexit is true. But as so often The Guardian manages to take the wrong lesson from this observation:

In 1975, the last time the UK went to the polls over the issue of EU membership, the yes vote won by a very comfortable margin – 67.2% to 32.8%. On that occasion, however, the entire national press was vociferously in support of staying in. The Daily Express, Daily Mail, Daily Telegraph, Times, Guardian, Sun, Mirror and Financial Times all spoke with one voice: it must be “yes”.

Those committed to keeping Britain in the EU can only dream of such a day this time. While most of the papers are yet to formally declare their position, Europhiles can confidently count on a much smaller number of supportive front pages on newsstands on 23 June.

The mistake is to think that newspapers (or other media outlets) lead or form public opinion. That's not what they do at all: they follow it. It is not true that the highly paid staff of the Daily Mail believe that everything either causes or cures cancer, nor that everything including cancer affects house prices. It's that they believe that's what their readership think and or are interested in.

So it is with more political things such as British membership or not of the European Union. Newspaper editors simply are not pondering the subject and then thinking about what they should persuade their readership of. Instead, they're trying very hard to work out what it is that their readership already believes and then pander to those beliefs. As the above notes, they got it largely right in 1975. The majority of the country was pro-EU and so was the majority of Fleet Street. Similarly The Sun does not consider the relevant manifestos before plumping for Labour or Tory. Instead, it tries to work out what the readership of that paper is likely to vote for.

So it is now: the papers can see that there's rather more opposition to the EU than there used to be and are thus trying to get out in front of their own market.

Please do note that we are not calling this one way or the other: nor, despite the well known views of some of us are here here advising either way. This is simply an observation about how the media works. They attempt, as best they can, to reflect the beliefs they think their market already holds. Thus some majority of them being pro-Brexit means, and this is all it means, that those running those newspapers think that some substantial portion of the population is pro-Brexit.

Standing has not been the cause of most football stadium disasters


The main—close to the entire—case for the English & Welsh government's ban on standing terraces in football stadia in the top two tiers is that standing is unsafe, pointing particularly to disasters where many lost their lives. Previously, I pointed out that standing in seated areas (which is an accepted part of the current system) has its own risks. Here I want to point out that many of the worst footballing disasters have not been associated with standing at all. Of course, the 1989 Hillsborough Disaster was associated with fans in standing pens, but though the Taylor Report into the disaster recommended all-seater stadia as a solution, it did not actually blame standing for the tragedy itself. Instead, the report points at poor organisation as the main problem, both in ticketing and crowd management.

The immediate cause of the gross overcrowding and hence the disaster was the failure, when gate C was opened, to cut off access to the central pens which were already overfull.

They were already overfull because no safe maximum capacities had been laid down, no attempt was made to control entry to individual pens numerically and there was no effective visual monitoring of crowd density.

When the influx from gate C entered pen 3, the layout of the barriers there afforded less protection than it should and a barrier collapsed. Again, the lack of vigilant monitoring caused a sluggish reaction and response when the crush occurred. The small size and number of gates to the track retarded rescue efforts. So, in the initial stages, did lack of leadership.

In their excellent 2007 report on the topic (pdf), the Football Supporters' Federation takes this further, pointing out that in the biggest disasters since Hillsborough—in Harare in 2000, Johannesburg in 2000 and Accra in 2001—all occurred in all-seater stadia. The same is true of most disasters preceding Hillsborough, including the infamous incident at Heysel.

Since their paper is now almost nine years old, I did a quick review of all of the other recent stadium disasters I could find, and most of them were unrelated to standing or happened in all-seater stadia as well.

All seater:


There are other examples which are harder to categorise, but which rarely or never look like failures of standing. In most of the tragedies I've deemed unrelated to standing, the crush came when people exited, or when police tried to control crowds by firing indiscriminate tear gas, causing a riot. Others are down to fake tickets and over-attendance. But it's clear that standing has played only an incidental role in most disasters—the case against standing per se is weak.

The 2016 Financial Advice Market Review


The Financial Conduct Authority is due to publish their Financial Advice Market Review within two weeks. The FCA took charge of regulating independent financial advisers with a brief, broadly, to get more consumers to have better financial advice at more competitive rates. Unfortunately the FCA’s mindset is regulating large corporations, not sole traders as IFAs are. It is, or should be, a truly competitive market with quality and price determined by informed (and there’s the rub) consumers.

The result was a complicated set of rules. James Cartlidge MP described in the House of Commons (Hansard 1st February 2016, p.738) his own IFA experience: “We had a famous document called MCOB—the mortgage conduct of business rules—which was the size of a doorstep, and none of which made sense to anybody. I think it is the assumption of the regulator that small practitioners have armies of compliance officers, just like the banks. Of course, nothing could be further from the truth.”

One of the worst new rules is the unbundling of advice from the financial products. Under this, the consumer pays the IFA up front for a lifetime’s advice and then receives the benefits in due course (or not of course). This may seem sensible at first blush but it is like paying Kelloggs for the lifetime value of their expertise to you and then buying cornflakes and Rice Krispies at cost thereafter. Consumers simply do not want to do that.

Cartlidge referred to the consequential claimed “loss of about 13,500 independent financial advisers” (15%). Senior industry figures reckon the use of IFAs has decreased by as much as 47.5% and, of course, the Treasury saw the figure as too low to start with.

Whatever the precise numbers it is clear that the FCA is failing in its mission to make the financial advice market more competitive. By increasing costs and complexity it is driving sole traders out and thereby reducing competition and value for consumers. The FCA cannot point to improvements in the quality of advice and consumers do not like the new charging arrangements. Most would rather muddle along on their own than take professional advice.

The FCA should see IFAs as potentially constructive partners in a joint effort to meet UK financial consumers’ needs, rather than wrong-doers needing to be policed. This would require a reversal of their current attitude. The 2016 FAMR is likely to add Pelion upon Ossa in terms of bureaucracy and cost, compounding the strategic problem.

I hope I am wrong.

You've got to pay the market price not just whine about nationalism


To the economist the definition of rent seeking is rather wide. It's really the attempt to secure a privilege in some manner, a way to corner something, free from that awful competition of the market. It being, of course, that awful competition of the market which reduces profits, thus seeking that protection leads to increased profits flowing to those who achieve the protection. Our example today is French vignerons.

As an official sponsor of France's Tour de France, there might seem worse choices than a wine named Bicicleta. But its discreet "Made in Chile" label has struck a sour note with French winemakers, who are threatening to block the three-week bicycle race unless it is replaced with a home-grown beverage.

One amusement to note:

The sponsorship contract has been in place for the last two years, with Bicicleta wine promoted in Britain at the opening stages of the 2014 Tour, and in Holland and Belgium last year during stages in those countries.

But Languedoc-Roussillon winemakers said they had only very recently become aware of the deal.

Light may have a certain speed, news travels rather more variably. And there's good reason why the French regard this region in the same manner we do darkest Dorset or the nether regions of Norfolk. Somewhat rural might be the polite way to put it.

But to the claim:

“It is unacceptable to allow the Tour de France organisers to promote a wine from Chile," the Young Farmers group (JA) said on its website. "They should be supporting only French produce."

The Tour is an entirely commercial operation, the sponsorship an entirely commercial matter. What the wine makers are insisting is that, on those grounds of produce nationalism, foreigners should be banned from such contracts meaning that locals can get them at cheaper prices. That is, this is rent seeking on nationalist grounds.

And, as with all other forms and types of rent seeking, there is only one correct answer: on yer bike sunshine.

Obsession with migration undermined serious reform of Europe


David Cameron’s renegotiation of Britain’s relationship with the European Union is not widely regarded as a resounding success. The ‘red card’ system allowing a 55% majority of national parliaments to scupper EU legislation, may, never be used as it is unlikely that a measure that gets through the legislative process would provoke such inter-state opposition. The Commission’s commitment to ‘try’ to reduce red tape could translate into little to no actual results. Freeing Britain from the commitment to ever-closer union and the official recognition that currencies other than the Euro exist may be merely symbolic.

The greatest ire-magnet has been the ‘diluted’ migration proposals agreed by Cameron and Donald Tusk. To the chagrin of opponents of ‘mass migration’, the proposals to limit in-work and child benefits for new migrants falls far short of the desire to ‘regain control of our borders’.

This was inevitable. For many Eurosceptics uncontrolled migration is the issue with the EU. Although demonstrably false, the perception that migrants ‘steal jobs’ and live off benefits are articles of faith. Equally, free movement of labour is so essential to the EU’s purpose and ideological priorities that the euro-elite would never grant any serious curtailment of migration between Member States.

Had migration not been the main emphasis of renegotiation, much more could have been achieved. Rather than quibbling over benefits, forcing Europe to confront its two-tiered reality should have been the primary focus of reform. Although the measures do not go far enough, weakening the commitment to ever-closer union, and even marginally restricting the quixotic euro-project’s ability to dominate EU policy, is a step in the right direction.

Whilst greater political integration has always been a feature of the European project, the EU’s real purpose and success has been the development of a single market where labour and capital move freely. For many Member States, and from an economic perspective, it is the latter that is the real attraction of the EU. Federalism and the Euro need not define the Union. Britain should be established as the leading voice for a looser, wider, trading bloc, which could be institutionally protected as existing in tandem with an increasingly politically integrated Eurozone.

Obsession with migration, and the perception that Britain is hostile to Europe, has directly undermined greater progress. In particular, countries such as Hungary, Slovakia, and Poland, who should be allies in reform, have mostly been on the other side of the negotiation table. Denmark, Ireland, the Netherlands, and Croatia, are sympathetic to a Single Market that is both deeper and less regulated, but have been wary of Britain’s apparently antagonistic approach.

Not only has Cameron secured weaker reforms than he may have done, Britain’s position in Europe will remain less central than it could be. Rather than being an essential counter-balance to quasi-hegemonic Germany, protectionist France, and integration-infatuated Belgium, Britain is at risk of having exhausted its political capital on insufficient reform.