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. 

Political engagement is fantastic but think what you really voted for

I congratulate the young for turning up in great numbers to cast their vote in the general election.  The main contribution by Mr. Corbyn’s Labour Party and Momentum was to mobilize political engagement among the young. Our politics and careerist politicians need shaking up — but promising the moon and hiding the true ideological nature of Mr. Corbyn’s Labour Party and Momentum was one of the most seductive and cynical plays that I have ever witnessed in British politics.

You voted for a change for the better, but be under no illusion, you cast your vote for a hard-core leftist party.  The Labour Party under Mr. Corbyn is guided by an ideological zeal that is based on both Trotskyist and Marxist-Leninist principles of proletarian dictatorship.  Over the weekend we saw demonstrators waving Hammer and Sickle flags and posters to defy Tory rule by striking, marching, and occupying outside Downing Street. Didn’t the demonstrators realise or care how offensive it was for us who have some understanding and personal memories of the 20th century history.  I grew up in Finland in the 1970s next to the Soviet beast.  I always remember lining up as a very young teenager waiting for a bookstore to open so that I could buy a book by Alexander Solzhenitsyn. It was announced in the news the night before that Dr. Solzhenitsyn’s book would be taken out of circulation as Finland couldn't be seen to be selling anti-Soviet material. Hammer and Sickle flags do not symbolise equality, freedom, and democracy. They are a symbol of an era of totalitarianism, oppression, gulags, KGB, refuseniks, and summary executions.  I call for Mr. Corbyn and the Labour Party of today to condemn such idealization of a regime that is a polar opposite to our parliamentary democracy.

Soviet Union failed, Venezuela and Cuba are economic basket cases.  Capitalism is far from perfect, especially capitalism that is based on cronyism, but the alternatives are far worse.  Mr. Corbyn’s Labour Party believes that human behaviour and economic decisions can be planned centrally.  Any economist worth her or his salt will tell you that this isn’t possible without political coercion.  Any political system that forces people to consume what is decreed by a central command, rather than for allowing markets to use the price mechanism to allocate scarce resources to meet what people wish to consume has failed and will fail.  Moreover, Mr. Corbyn’s Labour Party have shown their economic incompetence by stating that they will be using ‘bonds’ to renationalise industries as if ‘bonds’ were not real money.  I listened to a number of callers on LBC radio over the weekend who had swallowed this lie, hook line and sinker. Many of them stated that the government can use ‘bonds’ to fund the renationalisation programme.  Bonds are a form of government debt that accrue interest — real money that needs to be paid back with interest. 

You cast your vote to a Labour Party that will ruin this country politically, socially, and economically.  Any future government led by Corbynist ideology will leave you worse off and create an economic disaster for the future generations to pay off.  Finally, would you like to live in a society where you will be imprisoned for flying protest flags outside Downing Street.

 

We're being told things that ain't necessarily true

As we know there's much a' whinin' an' a' wailin' going on about the inequality extant today. After all, now that we've beaten absolute poverty in the rich would countries they the left must find something to occupy their energies, right, something to complain about?

It's just that some of the things they do say aren't in fact entirely true. As in, you know, factually not so?

Take this for example:Despite the perception that wealth inequality has been rising for decades, the research found that the inequality of net financial and property wealth fell steadily between 1995 and 2005, with the Gini coefficient falling from 0.71 to 0.64.

...

The shift in property ownership further towards the richest has contributed to the widening of wealth inequality. Including private pensions, the Gini coefficient rose from 0.67 to 0.69 from 2006-08 to 2012-14.

...

Total wealth across Britain, which includes private pensions, property, financial and physical wealth, rose in the wake of the financial crisis from £9.9tn in 2006-08 to £11.1tn in 2012-14. This has been fuelled by rising pension wealth.

That's all entirely true. Inequality of wealth feel modestly, it's risen modestly recently and pensions are a large part of the story. And given that it's pensions it's not all that much of a worry either. Because lifetime effects are going to account for much to most of that inequality. 20 year olds don't have pension entitlements, 65 year olds mostly do. Pension wealth is therefore always, but always, going to be unequally distributed just because that's the nature of the beast. 

But this next is untrue:

Private pensions account for 40% of the wealth total – the largest share at £4.5tn. The report forms part of the Resolution Foundation’s intergenerational commission. Conor D’Arcy, policy analyst at the foundation, said: “The accumulation of wealth over the course of our lives is arguably the most important driver of lifetime living standards, and yet it has been largely ignored in the public debate. Given the hugely unequal distribution of wealth across Britain, it’s time we looked into how the nation’s wealth is divided up and what the consequences are for those who never build up assets of any significance.

The reasons this is untrue are twofold. Firstly, we don't count unfunded (ie, most of them) government or civil service pensions as wealth. No, agreed, it's arbitrary to the point of lunacy that we don't. A public sector teacher getting a £30,000 a year pension is defined as having no pensions wealth, while a private sector teacher getting a £30,000 a year pension from a funded plan is defined as having pension wealth. And given that the pensions are the inequality causing bit it would be a good idea to get that little confusion sorted out, wouldn't it?

The second reason is rather larger though. The basic estimations of wealth here are entirely rubbish. Because they exclude the one great source of wealth and insurance for all of us, the welfare state. When we measure income inequality we do it after the effects of tax and benefits, obviously we do. When we measure wealth we're doing it before their influence. Meaning that our estimations have absolutely nothing to do with reality.

Which leads to the point we would make to the Resolution Foundation and others. Once you all start measuring wealth correctly then perhaps we'll have a discussion about its distribution.

 

 

Why we need to raise interest rates - the Ogden Rate

That interest rates were lowered to avoid economic collapse is just fine. We're really rather glad we didn't get a replay of the Great Depression, one which Ben Bernanke follows Milton Friedman in blaming upon the tight money policies of that era. However, there does come a time when we've got to unravel that, the Ogden Rate being an example of the sort of trouble we're going to get into if we don't:

Britain’s car insurers suffered combined losses of £3.5bn last year due to controversial new compensation rules for serious injuries, according to a report which predicts further sharp rises in insurance premiums, especially for young drivers.

Consultancy EY said the new Ogden formula led to significant underwriting losses for the motor insurance market in 2016. The unexpectedly deep cut in the Ogden rate, from 2.5% to -0.75%, prompted a furious backlash from insurers who claim that it will “overcompensate” victims of car crashes or medical errors in hospitals.

Although the change to the discount rate was announced in February, most insurers reflected the impact on outstanding claims in their 2016 figures.

No, we're not weeping for the insurers and their profits. This is an example of a much larger problem. Low interest rates mean that, obviously, risk free investment produces a smaller return. Insurance company profits are made up of both the investment returns upon the float and the performance of the underwriting. This is the mirror image of the size of payouts, in order top produce an income in the future a higher capital sum must be paid out now.

The important part of the economy this affects though is pensions. You'll have noted that near all funded pensions schemes have vast deficits - that's because more capital is needed now to produce a future income with low interest rates.

It gets worse than this too. Friedman again, the permanent income hypothesis, the idea being that we'll smooth our lifetime income over our lifetimes. If, after starting work, we're likely to live another 50 years but only work for 40 of them then we'll try at least to save enough in the 40 years to have an income in the last 10. Those savings are boosted by the investment returns from them over the years. If those returns are lower then we must save more now in order to so smooth incomes. 

This does in fact happen too. Generally, deposit rates in Chinese banks have been negative after inflation. That's why the gross savings rate is up at 40 and 50% of GDP. If you're losing money on your savings every year you've got to have a lot of savings to finance old age. We have also seen this in certain reports from the eurozone recently.

Yes, it's perverse, we would think that lower returns to savings will produce fewer savings. But that's not necessarily how it works, lower returns on savings can, by removing the investment gain on them, mean people saving more for their retirement. And at some point in this process low interest rates stop being expansionary, they become contractionary, entirely opposed to the reason we've got the low rates in the first place. 

Odd but true, the reason we need to raise interest rates is to stop people saving too much.

Why the British NGOs are so bad at fighting absolute poverty

That there's still near 10% of the human species out there languishing in absolute poverty is true. That we'd like to get that number to 0% and sharpish is also true. There are organisations here in Britain which ask you to send them money so that they can aid in this process. An idea and intention which we fully and entirely support of course, who wouldn't want to see the destitution of peasant poverty disappear?

It's just that at least some of them appear woefully misinformed about the subject under discussion. This is from some fool at Health Poverty Action:

Here’s the (heretical?) rub: it is understandable if people are losing faith in aid agencies and even in the idea of “development” itself. Because, broadly speaking, it hasn’t worked. We clearly haven’t solved the problem of poverty. Yet we’ve misled the public for years that poverty will end, if only they’ll give us £2 a month.

The main reason poverty thrives is that we haven’t addressed the interconnected, structural issues that create and maintain it: unjust trade deals, climate change, tax havens, the failed “war on drugs” and the lack of public services. Without tackling these issues (and those responsible for them) it is nigh on impossible to achieve social and economic justice.

Note the claim that poverty is created. It is repeated:

Stories about multinationals, tax havens, and the privatisation of public services would demonstrate that people around the world are victims of the same process of poverty creation and systemic injustice as we are here.

The idea that poverty is created is one of such drivelling inanity that it's remarkable that one who is literate can hold it. For we in fact know one thing about such absolute, extreme, poverty. As Angus Maddison pointed out, this has been the norm for almost all humans throughout all of recorded history. GDP per capita in the $500 to $800 range, annually, translates through into that $1.90 a day of absolute poverty (annoyingly we're using $ from different years as measurements there but the basic point stands, this is after inflation etc, changes in prices across geography). That's just what history was until the Industrial Revolution. Generation after generation, millennia after millennia, of what we now regard as the utmost destitution.

The thing which is created is the wealth which abolishes poverty. Only if we are to grasp this simple truth can we possibly craft plans, policies, to reduce said poverty.

This will sound dismissive, possibly even rude, but then it's meant to be both. You'll do better to reduce absolute poverty by randomly mailing your £2 a month to anyone on the planet. At least there you've a 10% chance of it aiding a poor person, a rather better opportunity than cycling it though an organisation as hopelessly misguided, ignorant even, as Health Poverty Action.

Of course, there's also the truly effective method, buy stuff made by poor people in poor countries. That is the method of this past generation, the one which brought absolute poverty down from 40% of all people to that just under 10%. You know, the one that works, the one that drove the biggest reduction in poverty in the history of our species, that neoliberal globalisation.

It’s Adam Smith’s birthday!

At least, we think it is. We know when his birth was registered at the local church in 1723, and the presumption is that he was born a couple of days earlier. Then you have to add on a few days for the calendar change that happened in 1750, and you get 16 June.

After a mostly uneventful childhood in Kirkcaldy, on Scotland’s east coast (although he was briefly kidnapped by vagrants) Smith entered the University of Glasgow, then went to Bailliol College, Oxford—where he found that the professors had “given up even the pretence of teaching” because they got paid whether they taught or not.

Returning to Scotland, he joined the staff at the University of Glasgow, where he wrote a book on ethics, The Theory Of Moral Sentiments (1759). It brought him instant fame. Enlightenment thinkers sought a firmer foundation for ethics than the dogma of clerics and commands of kings. Some sought ‘rational’ alternatives. Smith, however, identified morality as a feature of human social psychology. We have a natural sympathy for others. Their pleasure or pain affects us; and we like to act in ways that please them. As the book begins:

How selfish soever man may be supposed, there are evidently some principles in his nature, which interest him in the fortune of others, and render their happiness necessary to him, though he derives nothing from it except the pleasure of seeing it.

This natural sympathy binds and benefits the whole human species.

The book’s success prompted the Duke of Buccleuch’s stepfather to hire Smith, on a pension for life, to tutor the young Duke. Taking him on the Grand Tour of Europe, Smith picked up endless facts about different systems of commerce and regulation. He started writing The Wealth of Nations, weaving current and original ideas into a new, systematic, modern approach to economics.

The book debunked mercantilism, the prevailing system by which countries tried to boost their cash resources by selling as much as possible to others, but buying as little as possible from them. So they subsidised exports and raised resisted imports.

Smith, however, showed that both sides benefit from trade, not just sellers. The sellers get cash, but the buyers get goods that they value more than the price. What makes a country rich is not its gold reserves, but vibrant trade and commerce. Wealth came from liberating commerce, not restricting it.

The huge productivity gains made possible by the division of labour boost that wealth even more. Specialist producers may be thousands of times more productive than amateurs. They can produce surpluses that they can sell, giving them funds to invest in capital equipment—raising their productivity even more. This they do to benefit themselves, but their actions actually benefit everyone:

Every individual... neither intends to promote the public interest, nor knows how much he is promoting it... he intends only his own security; and by directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.

Another unplanned benefit of commerce is that it automatically steers resources to where they are needed. Where things are scarce, consumers will pay more, so suppliers produce more. When there is a glut, prices fall and producers switch their effort into more profitable lines. So, without any regulation and planning:

[T]he obvious and simple system of natural liberty establishes itself of its own accord. Every man...is left perfectly free to pursue his own interest in his own way.... The sovereign is completely discharged from a duty [for which] no human wisdom or knowledge could ever be sufficient; the duty of superintending the industry of private people, and of directing it towards the employments most suitable to the interest of the society.

This liberal system benefits the poor most. Smith railed against merchants using their political influence to win monopolies, tax preferences, controls and other privileges that distort markets in their favour—what today we call crony capitalism. He concluded that government must be limited to its core functions of providing the defence, justice and infrastructure that is needed for commerce to succeed. Leave people free, end cronyism, and the results will amaze you.

Smith’s ideas were highly influential. The great free-trade era they ushered in, and the enormous rise in wealth it created—particularly for the poor—did indeed amaze the world.

Happy birthday, Adam Smith!

Another campaign issue turns out not to be true

It's not unusual for an issue to become a public truth, simply because so many people state it so often, but for us to then find out that it might be public but it's not a truth. The interesting thing is how may people then follow Keynes and change their minds because the facts do? 

Not all that many is our own observation:

The "buy-to-leave" phenomenon in housing has come into question after a report commissioned by the Mayor of London found that almost no homes in London owned by overseas buyers are being left empty.

The research, by the London School of Economics, found that "there was almost no evidence of units being left entirely empty - certainly less than 1pc". 

Foreign buyers are indeed purchasing properties in one of the great global cities. But they're not leaving them empty, they're either using them or renting them out. Thus the entire idea of said foreigners hoarding those scarce London dwellings seems to be false.

Sadly, we don't expect any of the campaigners to change their minds. that's not how politics works, is it, it's not an evidence based process?

Which is, of course, why politics is a markedly bad manner of managing lie except for those issues which can only be solved by politics. Far better to leave everyone alone and let them get on with it, eh? Given that politics isn't based upon either evidence nor logic, neither being useful attributes in a management system.

Questions to which the answer is no

The answer here is no. The Institute of Metals wonders whether rising prices and a market shortage are going to stymie technological development.

No.

The BBC wonders whether whether we might have to worry about smartphone rationing:

Could you cope with smartphone rationing?

No.

Further:

A number of metals are crucial components in a range of technologies, from smartphone batteries to electric cars. So could a market shortage and spiralling prices put the brakes on the global tech industry?

No.

Firstly we've the obvious point that rising prices are the solution to a "market shortage," rising prices make market shortages go away. Suppliers are induced, by their lust for lucre, to produce more, users are, by their distaste for having to part with pelf, persuaded to use less.

Prices are the damn rationing system that is.

We've also dealt with this at near book length. There simply is no mineral or metal we're going to run out of in anything like a human timescale. Sure, we might have to spend a little more digging up some bits of rock, might face variable prices while we attempt to incentivise people to do so but there simply isn't a shortage, isn't going to be a shortage, of anything we use to build our civilisation.

The answer is just no.

Sure there're more fat people around - ain't that great?

The New England Journal of Medicine tells us both that there are more fat people around and also that this is leading to a rise in certain diseases. To which our response is, ain't that great?

The prevalence of overweight and obesity is increasing worldwide.

That's their opening line and we can't see anything to argue with there. They also tell us that the more developed a place the more likely it is to have a lot of fat people:

In 2015, at all SDI levels and for all age groups, the prevalence of obesity was generally higher for women than for men, with the highest prevalence among women between the ages of 60 to 64 years living in countries with a high SDI (Figure 1). In general, the prevalence of obesity among both women and men increased with the increase in the SDI across all age groups.

That SDI is the sociodemographic index and yes, it reads that a higher number means a more economically developed nation.

All of which we would say is greatly cheering. Certainly, there are aesthetic reasons for not desiring too many fat people around but the basic underlying story here is that we've solved the great and original human problem. How do we produce enough food to keep everyone alive? 

For we note that before about 1820, just as the Rev Malthus sat down to write it all out, the major limitation upon population size (in both senses, number of people and size of people) was the ability to produce enough food. People really did drop dead from lack of it. As Amartya Sen has pointed out modern famines are more about politics and inadequate - even purposefully so - reactions to dearth but there were millennia upon millennia where people really did starve down to skeletons then die through no one's fault nor intention.

That the world is now roamed by those too large for yoga pants might indeed be a problem of sorts but it's a very different one, it's one that stems from our having solved the basic and long running human problem of what's for lunch. The solution brought to you, of course, by private property, trade, free markets and capitalism.

This also illustrates a core contention of economics, that there are no complete solutions, only a series of trade offs. We are where we might have to worry about the prevalence of diabetes, rather than which one of our children, or even all of them, will starve in the next couple of years. We can't help thinking that this is an advance in the human condition.

At which point of course The Happy Dance even if the size and weight of us all makes it an unedifying sight.