Tuesday, 27 June 2017

On The Easterlin Paradox

Those of you who are readily interested in the social sciences may have heard of a paradox associated with economist Richard Easterlin called the Easterlin Paradox, which is basically a hypothesis that at an individual level higher incomes make people happier, but a nation full of people with higher incomes does not make a happier nation.

I've written before about how cautious we ought to be with notions of measuring happiness, and even posed the occasional interesting thought experiment about the nature of happiness, and Easterlin himself received criticism regarding the nature of the data and analysis he posited.

Personally I'm quite sceptical about the validity of trying to measure people's happiness in terms of how happy they say they are. How would one know whether on a scale of 1 to 10 a Belgian cattle farmer in 1974 was happier than an Israeli Rabbi in 1990 if they both answered 8/10 in a happiness survey? It's a matter I talked about before in a previous Blog post, but it bears repeating here:

"If the average Brit rates their happiness as 7.4, then how does that compare to the 7.4 variant in, say, Sweden or Sudan? Perhaps a personal rating of 9 in Sudan would only be equivalent to a 6 in Sweden. Sweden is a more prosperous country than Sudan – so maybe a Sudanese person's happiness is measured without knowing how happy they could be in a more prosperous country.

Maybe in some cases the opposite is true - perhaps some Sudanese people see European modernisation as being full of unenviable plights (depression, addiction, binging, celebrity worship, lack of spirituality, etc). Maybe Swedes are more developed because they are less naturally content than Sudanese people. Who knows? The point is, nobody knows, because one's own personal interpretation of people’s reported happiness says almost nothing about actual happiness as a quantifiable state.

That a plighted Sudanese man might rate his own reported happiness as scoring higher than the average Swede or Brit will strike some people as strange - not because it should be assumed that the Sudanese man should be less happy, but because the criteria by which people measure their self-proclaimed happiness cannot be contained by any objective metric, irrespective of whether we are comparing nation to nation, or century to century.

To show this, let's use two objective qualities as an illustration - height and weight. If you compared the average Brit today to the average Brit 100 years ago, you'd find that the average Brit today would be a few inches taller and quite a few pounds fatter than their century old counterpart. So asking a man today 'Are you tall?' or 'Are you fat?' doesn't tell you anything about historical trends or comparable data, nor would the answer given provide us with any clue about an objective identification without recourse to other statistics. A 5ft 9, 12 stone man probably would have answered 'yes' to both questions in 1914 and 'no' to both questions in 2014.

Similarly, people might on average be happier now, or they might have been happier in 1914, but simply asking 'Are you happy?' brings no light to the measure of happiness at all. This is because all self-proclaimed accounts of happiness, fatness or tallness depend on how you feel in comparison to others in your society. If happiness has increased, it won't show up in reports of happiness because our perceptions adapt to the changes in society. In other words, if we expect our happiness to increase, then our happiness rating won't necessarily change in value (because the value is measured against perception of our peers) but it will increase in absolute value, just as being in the median in height doesn't change your relative position, even if you are a few inches taller than someone in the median range in 1914.

Because we rate these things in comparison to others in our society, it means that if on average everyone in UK societies gradually gets happier (as they have fatter and taller) the members of the UK will rate happiness as unchanged. Despite these significant changes, most people when asked would tend towards a report that places them somewhere near the median. It isn't the number of people who class themselves as a 7.4 on the happiness scale that changes (same goes for fatness and tallness scales) it is the happiness levels of the 7.4 that changes."

There is another factor that could be at play too. The measuring of happiness can also change in accordance with the standard of the measuring. By which I mean, a happier society may well have standards of questioning that raise the bar for minimum standards of happiness. For example, having a 44 inch TV and a mobile phone would have contributed more to someone's happiness a few decades ago than today, where most people have those things. If we expect more these days, then relatively speaking we may not climb up the happiness ladder relative to our material gains. It's Adam Smith's linen shirt all over again.

Moreover, there is another reason why increased prosperity may not climb at the same pace as increased happiness. And the reason may be that people very much measure their situation relative to others in their country, so even substantial material gains may not greatly increase individual happiness if their status is making little or no gains relative to others in their peer group. I suspect - and I've always been impervious to this feeling myself - but I suspect that having a phone that is the flashiest in your social circle gives individuals more intrinsic pleasure than that same phone when everyone else has one too.

Ask a 12 year old whether they'd rather have a penny doubled every day for 30 days or £1 million and if they had to answer within 5 seconds they'd probably choose £1 million. But a penny doubled every day for 30 days yields around £10.7 million - it's just that humans unaccustomed to the size of exponential growth struggle to get to grips with this at first.

Remember, humans have by a long way advanced more growth in the previous 250 years than the previous 250,000 before that. Exponential growth has given rise to a great progression-explosion that, if it continues, will see future growth, prosperity and luxury beyond what we can easily imagine.

A physicist called Tom Murphy once declared that there is futility in exponential economic growth in that if our energy consumption grows at 2.3% per year then we'll all suffer from raw material blitzkrieg within about four hundred years. His confusion - much like the confusion of Thomas Malthus over population growth - is that economic growth is not so closely correlated with energy consumption growth, far from it.

I don't have the statistics to hand, but can remember them roughly from when I did, and in recent decades as technology has increased its capability exponentially, humans have nearly doubled their economic growth but their energy inputs have risen by under a quarter (and because of how technological advancements exponentiate, that gap is only going to widen). And if you take out developing countries from the equation and include only the most advanced two dozen countries, you'll find that economies have grown but energy consumption rates have flattened, and in some cases declined.

Economic growth happens alongside, and because of, technological progression - the progression from paper to laptop, from fuel to electricity, from high energy to low energy lighting, and so forth. Even though from an aerial view, cities like New York, London and Tokyo look like they are powerhouses of energy output, they have, in fact, a lower energy consumption rate per person than the national average of those countries.

I have a hunch that as our technological capacities continue to exponentiate, we'll eventually evolve into creatures of pure thought, where we master the ability to live disembodied virtual reality lives, retaining our thought through computer simulated brains. Having said that, the transition from where we are now to where we'll be then may well involve some pain along the way.

On a timescale of 1 to 100, if where we are now is 1 and where we'll be in our virtual reality luxury is 100, there will possibly be a period of time, perhaps around the 80 to 90 mark where we'll encounter an international crisis, whereby a large proportion of the world's population may be unable to add enough economic value to the world to earn a living. That might occur if the proportion of working humans is vastly outstripped by the proportion of robots able to do the jobs more efficiently than them (however, as I've argued before, there are reasons to believe this may not happen).

Sunday, 25 June 2017

The Skeletons In The Welfare State's Closet

Let me tell you something fascinating about the welfare state. As a society almost every single individual in the UK is in favour of it, but yet each individual, if asked to pay some kind of hypothetical pre-birth Rawlsian insurance to act as a safety net in case they required it themselves, wouldn't actually pay it (this is based on research in America, so one can assume it would likely apply here too). This would suggest that, in actual fact, society's collective preference for a welfare state is more akin to an Abilene paradox, where every individual feels everyone else is in favour of a fairly large welfare state, so feels they ought to be too.

A generally good rule of thumb in life is that you can see how much people value things by how they behave. From what I remember, your chance of dying on the road in a car is something like 5,000 to 1. Would you pay an extra £10 a day to increase those odds to 6,000 to 1? I highly doubt it, and neither would I. Would you pay an additional £5 per year to reduce those odds to 500,000 to 1? You possibly would, and so would I. This signals how much we value a reduced probability of dying against a certain financial cost such as insurance. Personally I don't value insurance very highly generally - so for example, I would not insure white goods or a bicycle I'd purchased., but many people would.

Now suppose you got to make a pre-birth insurance decision before you know anything about what kind of person you're going to be, the indication is that you wouldn't pay anything. For all you know you're going to be born in the shallow end of the talent pool, yet research shows you’re prepared to take the risk and not pay the insurance premium. I think the central reason for this is the disincentive effects – that is, the main problem with a safety net is that it is open to being (at worst) abused and (at best) something upon which people can become overly dependent. The study showed that individual preference, in a pre-birth decision scenario (there are parallels of Harsanyi’s amnesia principle here), favoured a welfare state that contained a population of just 0.6% (that’s six tenths of a percent) of the population.
Obviously I’m taking this as precluding pensioner welfare and people who’ve paid a lot into the system but need to claim a bit back due to short-term unemployment. This is really about long-term dependents, people struggling to find work, people abusing the system and people using welfare as a lifestyle choice. I should imagine the general feeling is that this ‘0.6% of the population on welfare’ ideal, which in terms of UK population would be approximately 390,000 people, is largely confined to people with disabilities and barriers to work (although apparently that number far exceeds 390,000, it’s more like 11 million).

It would seem that when we are being most candid with no public pressure to conform to a certain viewpoint, the UK as a population is glad to have a small welfare state for society's most needy, but is furtively quite narked about the proportion of the welfare state that enables otherwise work-fit and able people to enjoy a life of taxpayer-subsidised leisure.

There are obvious reasons why this is the case, and they are nearly all underpinned by one governing principle: that people feel it is unfair when they have to pay for benefits for others that they cannot enjoy themselves. A good example is leisure. People who work a 40 hour week have less leisure time than people who have a 40 hour leisure week and claim jobseeker's allowance. An even bigger example, and one that is far less obvious, is parenthood. People who cannot afford to have 3 or 4 children are subsidising people who can, because according to Aviva it costs upwards of £270,000 to raise a child up to the age of 21.  

Or to put it another way, if it costs £810,000 to raise 3 children, and £1,080,000 to raise 4 children, it stands to reason that for most people you have to be on benefits to afford to support families of that size and larger. Working people cannot afford to have as many children as people on benefits, and the most expensive thing working people have to pay for is the state. Moreover, state-mandated reallocations from middle earners to benefit claimants incentivises benefit claimants to have more children (and equally more people to become benefit claimants) and this increases the cost of the state further, while at the same time reducing the opportunity for more middle earners to have children.

There is no easy solution to this problem - we cannot put a cap on the number of children people can have, and we cannot live in a society where children go hungry. But I have three principal must-haves for a well-functioning welfare system, and it would appear that in the deepest recesses of their honesty, people agree with me. They are:

1) The idea of a redistributive system whereby those who are best off do their bit to help those who are least able.

2) The redistribution system must guard heavily against incentives to abuse it or become overly-dependent on it.

3) In terms of taxing those most able to help those least able, it is best to tax in ways that do not discourage work, innovation or productivity.

Pretty much everyone already openly agrees with number 1, and pretty much everyone agrees with number 2, although they are more cautious about admitting it. But judging by the current state system of redistributive taxation, an awful lot of people have not got to grips with number 3 yet, which is a shame because getting number 3 right is the most effective way of helping people on benefits.  

Finally, the 2016 release of the much lauded movie I, Daniel Blake by Ken Loach, and the rise of Jeremy Corbyn in the same year, has prompted thousands of people to take to the streets and declare war on a capitalist system that has left benefit claimants maltreated and disregarded by heartless bureaucrats. While I'm sure there are plenty of people for whom this has been the case, when it comes to the overall picture, nothing could be further from the truth.

The stats are far too numerous and lengthy for this blog post, but go and research just how much the welfare state has expanded and proliferated as a proportion of GDP since Ken Loach first began his film career, and you'll see it is gigantic compared with 50 years ago. Consequently, Loach and Corbyn - the self-proclaimed defenders of the poor - are picking the wrong enemy in capitalism, because it is only thanks to the kind of economic growth that comes from trade and competition that we can afford such a large and costly welfare state.  

Saturday, 24 June 2017

Heck, Even Corbyn Has Out-Corbyned Himself This Time

Jeremy Corbyn has felt buoyed recently - his better than expected election vote-share and the cult of personality that's surrounding him are giving people amnesia about the fact that his policies are complete economic lunacy and would bring about the worst recession this country has faced in decades.

But this latest bit of publicity - insisting that teen workers should get £10 an hour by law - so comprehensively exposes his ignorance and carelessness that even many dyed-in-the-wool lefties are now saying "What the heck is he playing at?". Because you would have to be so wilfully uninformed about even the basics of supply and demand curves to even think of such a ludicrously counter productive policy, let alone publically declare it as a policy on your wish list.

Being completely clueless about the negative effects of price floors is one thing. But what's truly bizarre about it is that when you analogise it to a topic that isn't jobs but goods or services no one has any trouble seeing how silly the principle is. Suppose the government made it illegal for anyone to sell bathroom suites for less than £10,000. It is obvious who would be hurt by such a policy; those that cannot afford bathroom suites of £10,000 or more, and those trying to sell bathrooms below £10,000.

Such a silly law wouldn't help people in the market suddenly be able to afford a bathroom suite, and it wouldn't help the firms trying to sell them either, because the law won't make less expensive bathroom suites suddenly worth £10,000. Anyone who can see the logic of being against a £10,000 minimum price of bathroom suites but cannot see the same logic for minimum wage laws is not being consistent.

If you still cannot see this, let me put it another way. Suppose you support Labour's plans to raise the teen living wage to £10 or £11 or even £12, thinking how wonderful it'll be for low teenage earners to now get a 'fair' wage. I'd have to ask, why don't we make a law that gives them an even 'fairer' wage - say £20 an hour or £30 an hour or even a 'super-fair' wage of £40 an hour?

I don't think there is anyone in the country who thinks a £40 an hour living wage is a good idea, because anyone can see the problems that would occur with it. So you'll note that that means even die-hard Corbynites can agree in principle that there is a living wage law that would be too high to implement because it would do lots of damage in skewing the marginal value of labour, particularly in the teenage labour market where inexperience and additional risks are built into the employer's decision about whether to hire.

What isn't clear is why they can see it's a bad idea for £40 an hour, or £30 an hour, or even £20 an hour, but they cannot see it for £10 an hour. You may come back with the argument that it's obvious that £40, £30 and £20 are too high, but there comes a point when the number is just right. But that doesn't hold, because if you can see the logic that a price floor hurts both buyers and sellers, whether it is for bathroom suites, cars, labour or any example you'd care to mention, then the price floor is going to hurt more people than it helps at any level where it interferes with the real value of prices determined by supply and demand.

Suppose the living wage is set at £10 an hour. In the labour market, if a worker can produce £7, £8, £9 or £9.50 per hour worth of output to his (or her) employer he will be hired for a wage rate that's below the marginal value of his output. This means that a living wage law of £10 prices out all those people from the labour market - it makes it illegal for them to provide the firm with the value of their labour, which is bad enough for adults, but positively asinine if you extend the law to preclude inexperienced teenagers who are worth even less to prospective employers, and are keen to break in to the job market.

Equally, it fails to account for the fact that if a teenager's labour is really worth £10 an hour to an employer, his salary should climb up to that value purely by market forces. To see why, suppose you are producing £10 per hour worth of output to your employer but you are being paid £7.50 an hour. As long as prices are not too sticky, a competing employer could procure your services for a rate higher than £7.50 an hour but lower than £10 an hour - and in a competitive market your wage rate would be bid up until it fell just below £10 an hour.

I hear Jeremy Corbyn and John McDonnell are scheduled to appear at Glastonbury this weekend. My advice to all the teenagers at the festival would be to grab handfuls of mud and chuck it as these two fools until they look as dirty as their latest imbecilic living wage policy.

Monday, 19 June 2017

I Think There's One Big Flaw In These Sexual Abuse Trials

Like me, you may have been distracted recently by a little thing called the General Election, as well as terrorist atricities in our major cities and now the Grenfell fire tragedy. So much so that if you blinked you might have missed the news that Rolf Harris will face no further legal action over allegations of historical sex abuse after a jury was unable to reach verdicts on four charges, and prosecutors said they would not seek a second retrial.

The disgraced entertainer and artist, who was jailed in July 2014 for unconnected sex attacks on young girls and women, was being tried for the second time over alleged sex attacks on teenage girls in the 1970s.

At the time of Harris's conviction I remember having a discussion with some Facebook friends regarding what I thought was a very interesting but highly contentious issue surrounding the matter of jurisprudence and how things change over time. I never got round to blogging about it, so thought I would today as it should at the very least give you pause for consideration of something litigiously debatable.

What’s extremely contentious about the original outcome is that Rolf Harris was charged under the sexual offences Act of 1956, because the offences happened at a time of old legislation. Basically, if he’d have done the same things now he would have received a heftier sentence, because cultural evolution has shifted people’s perspective and tolerance on crimes like paedophilia, with penalties now being severer.

Now I'm not 100% certain that this view of mine is correct, although I think it is probably more correct than incorrect, but I don’t think it is right that someone should receive a shorter sentence that has been matched to the legislative time of the crime(s). It seems clear to me that past crimes should be penalised according to the present legislation (and I mean this generally speaking, not just taking into account Rolf Harris’s situation).

Let's face it, crimes like rape, child sex offences, racism, homophobia, and social legacies like sexism and misogyny, belong to a class of behaviour that society used to treat too lightly. And while far from perfect, today's UK society is at least a society that treats these things much more seriously, and has less tolerance for these things than at any time in history.

Given that legislative measures and acts of jurisprudence are built on a cultural evolution of the increased wisdom and revisions of human beings over time, I’m of the view that sentencing for any crime should be administered according to the legislation of the time of the trial, not the offence. Otherwise it rather undermines the perceived wisdom that went into the revision processes of jurisprudence over time.

I remember at the time, my friend Mark made an interesting point; he warned that it could set a dangerous precedent. He says: “If we raised the age of consent to 18 we could then punish all those who had sex at 16″. My friend Jacqui added a good point which illustrates a thin end of the edge-type of caveat. She says: “We had hanging back in the early 60s, so if somebody was now found guilty of murder back in 1960 do we get to hang them?”. Quite! These are good observations made.

Apart from a difference in scale of penalty, the legislators at the Rolf Harris trial agreed with this action *in principle*, just not in practice. They were willing to penalise in accordance with past legislation – but only if it was the right kind of past of legislation (I’m certain that if tomorrow they had a trial in which a man was found guilty of committing murder in 1959 they would not sentence him to hanging).

The thing about Mark and Jacqui’s points, though, is that two different things are being conflated. Mark makes his point in relation to a change of law, whereas Jacqui makes her point in relation to a change of perception of appropriate sentencing.

The Rolf Harris incident should be assessed under the terms of Jacqui’s analogy because the Rolf Harris legislative issue is not to do with a change of law (his crimes were still illegal in the sixties) but a change in the perception of appropriate sentencing. The key difference is that if we raised the age of consent to 18 we could not reasonably punish all those who had sex at 16, because they were doing so at the time from within the orbit of the law. Conversely, in terms of jurisprudence, murderers that were hung in the 1950s differ from murderers now only to the extent that punitive measures differed – the act of murder was still against the law.

Hence, in conclusion, if revision of jurisprudence is to avoid being undermined, I think people should be convicted and sentenced under the (present) legislation at the time of their trial, not under the legislation of the time of their crimes, as Rolf Harris was. As I say, it's a not a view I definitely know I'm right on, I could be persuaded it's wrong if anyone has a robustly convincing counterargument (if so I invite you to share), but as things stand I think it's the right view.

Wednesday, 14 June 2017

Politicians Desperately Hope You Never Get To Find Out About Things Like This

The General Election has been fun and entertaining, but the biggest national problem we face is way bigger than any party politics or distribution of seats across Parliament. Compared with what I'm going to talk about, the question of which party has the most seats in the House of Commons is fairly inconsequential - although for reasons that will become clear, there is the case of a lesser of two evils.

When young people turned out in their masses to vote for a radical left wing party in the hope that they will cure society of its economic ills, what they were doing is the equivalent of going down to the engine room on the Titanic with their screwdrivers and spanners looking for ways to increase the ship's nautical miles per hour.  

Before you read on, just click on this web page – it illustrates the remarkable national debt rise of £5,000 per second. You'll also notice a statement that says that the national debt equates to "£78,000 for every person in the UK". Hidden behind this is something very important, and it's related to all the things voters were dismayed about when they voted, and the fact that they would be utterly shocked to find the real source of their unhappiness. 

Let me now explain why with something that many of you will not know. Politicians are ruining things for us far more than they hope you'll ever realise, because the truth is, it is actually a combination of debt, borrowing and currency inflation that is causing the vast majority of the things people have been complaining about and squabbling over in this election – from the public sector crisis, to the NHS, to social care, to low wages, to levels of taxation, to the difficulties of the JAMs (those just about managing) – all of those election issues are secondary to the primary problem that affects society, and that is the immense harm that politicians do to the value of money.  

To begin, let me explain how lending actually creates new money. Only about 2% of the money in Britain and America is cash, the rest is electronic - it is 1s and 0s on computers. Under the gold standard the money supply is limited (as there is a limited amount of gold in the world), but under the digital system there is nothing to constrain the amount of money created in fiat currency.

Banks no longer make loans by attaching it to gold stored in its vault. Now it's pretty much all digital, meaning that even if you are merely an individual customer looking for a loan in your own bank, as long as a prospective borrower does not literally want the actual notes as a term in the loan, the bank doesn't need to have the money before it makes a loan.

On a much larger scale, the money the government creates is a fraction of all the money created in circulation in terms of loans. As all this new money is created, the money already in circulation is devalued, which means people who hold the current money, that's you and me, are made worse off. We must add to this the problem of centrally created interest rates, which is the price of borrowing money. The market system of pricing of goods and services is the most effective way of setting prices, and the same should be true of the price of money, which when all is considered is the most important price of all.

Money is now a political football for politicians to play around with as they see fit for their short-term interests. All this money created has pushed up prices, so when wages rise less frequently your pay packet buys you less than before, which makes day to day living seem more expensive. And this is pretty much all the government's fault - they have done more than anyone to create the JAMs. 

To see why, imagine an island of 100 people. Of those, 50 people have £20 and the other 50 have no money but assets worth £20 per person. The islanders will freely buy and sell these assets at £20 a time. If more assets appear on the island the price of assets will drop. Now suppose instead of more assets there is the same amount of assets but more money thanks to the appearance of a man with £1000. As there is now double the money in the economy, selling an asset for £20 seems too cheap, because the £20 is now devalued. Asset prices rise to reflect the fact that there is now £2,000 in the economy, which reduces the purchasing power of all the rest of the islanders with £20 to spend.

This is what has been happening to our developed economies over the past few decades. Wages cannot keep up with inflation because the government's injection of extra money into the economy negatively impacts people's purchasing power through money devaluation. A good illustration of this can be seen by looking at the housing market and the difference between old and young people. For young people the cost of getting on the housing ladder has risen to reflect all the additional money that has been put in circulation. Older people got to buy their houses prior to this, so they benefit from higher house prices disproportionately higher than they originally paid.

And of course, with crony capitalism the money pumped into the economy by central banks is not finding its way to the everyday member of the public, it is going to people in the banking industry with special political interests and politicians on side to ensure the money supply is inflated to fulfil their mutual interests. By way of analogy, it is rather like when aid money is given to Zimbabwe or Sudan but only a small proportion of it makes its way to the neediest people because it is filtered through corrupt officials.

All the ways the economy is devalued, through printing money, through excessive borrowing, and through deficit spending, society is being turned into part Ponzi scheme part credit-pumping pyramid scheme where those nearest the new currency gain the most and those furthest away from it lose out, because by the time all this extra money reaches them it comes in the form of higher prices for goods and services relative to their wages.

I said that this disproportionately affects the young more than the old. And naturally the younger you are the worse this affects you, because you currently have no assets, just a national debt that you and the millions of unborn people will have to pay back. Okay, you don't literally pay it back in the same way you would a friend who'd lent you £10 in the pub last Saturday, but you pay it back more subtlety in the shape of less purchasing power, more things being unaffordable, and state-based initiatives that skew the wealth from the bottom of the pyramid towards the top.

Many leftists believe that all these things like unaffordable housing, higher levels of inflation, stagnant wages and increased struggling to make ends meet are because of capitalism and the way that the market makes the rich richer at the expense of the poor. It is simply a lie - these things are not caused by free markets where people buy and sell in accordance with the marginal value of the goods, services and labour - they are caused by governments and crony capitalism which consist of rent-seekers that rig the system to favour the elite over the rest. This sort of financial skewing would not happen in a freer market where the price of money was conditioned by supply and demand and where the ability to add more money into circulation was quelled.

A phenomenon called Wagner's Law states that as the economy develops over time, the activities and functions of the government increase. As progressive nations expand their economic growth, the proportion of money that goes into the public sector grows too, because there is more economic growth for politicians to get fat off in the shape of transfers of wealth. What you have to remember is that the state doesn't create anything of value, it merely reallocates sideways money that has already been earned by private sector value being created. That's not to say the state provides nothing of value to society - I don't mean that at all - I mean that the state doesn't create value by inventing things or by innovating.

Here is a fact that ought to absolutely startle you. The state is now approximately 25% of the entire country's workforce, and yet less than 15% of new currency goes into the private sector. Imagine all the talent, innovation and prosperity that could have come in the shape of value-creation if the state hadn't creamed off so many of the nation's resources for politicians' own gains.

Here's how things should be
Picture the scene: imagine you live in a society in which no central bank or government can add more money into circulation, and no government can run a deficit (UK governments have run a deficit for literally 95% of the past 40 years - 38 years out of 40), meaning they can only spend what they collect in taxes. And further, imagine they can only tax with utmost transparency - there are no more stealth taxes, and every tax they take has to be justified with visible recorded expenditure accessible to everyone.

In other words, the state has to play by the same rules as everyone else - only spending what they have and only spending money on things that people want them to spend it on because they value that expenditure more than alternatives. Even wars, like the ones in Iraq and Libya could not go ahead unless taxpayers voted with their wallets and provided the funds for the government. If you take away the government's ability to spend excessively you force them to only spend money on projects and services that people value. At present there is very little stopping them printing whatever money they need to action whatever cause they like.

Since the Nixon shock of 1971 when the link of money to a gold standard was discontinued, we have had a system built on borrowing and credit and printing of money that has left us all drowning in a reservoir of debt and deficit. Because of politicians' short-term aims, they manipulate currency to carve our their own political career knowing that most of this activity goes on out of focus of the naked eye of the electorate and at a rate that will do most damage to people who will be working long after their political careers have ended (a good example is the effects of the Nixon shock that played a huge part in the 2008 financial crisis that occurred 14 years after Richard Nixon's death).

Gold as the money standard was a good method for ensuring a limited and therefore more civilised government, whereas unlimited fiat money leads to uncontrolled currency expansion that thins out the value of money. We talked about house prices going out of control a moment ago thanks to currency inflation, but also supply and demand problems. Have a look at a product that doesn't have the same kind of supply and demand problems as houses - I'm talking about oil. Here you can map the price of a barrel of oil from 1946 to the present day. Look at how stable the price of oil was when the dollar was linked to gold, and look at how it fluctuates at a much higher level afterwards. The price of oil if measured in gold hasn't changed much at all since 1946, whereas the price of oil in dollars or pounds has shot up drastically.

The same goes for most consumable goods - their prices have risen far higher than they would have if the government had been kept in check with its careless handling of the money supply - prices of goods have risen higher than average earnings. Had government activity been wedded to the gold standard and prices of goods, services and money been more in line with supply and demand, the link between average earnings and prices of consumables wouldn't have been so out of line, and the relative value of things would be clearer for all to see. You may not realise this but many businesses either suffer hard times or go bust altogether because of distorted currencies where the supply of money created by governments is not constrained enough, or in some cases not at all.

Have you ever thought about the cost of government quantitative easing in terms of families in the UK?

"Both the Bank of England and the US Federal Reserve embarked on QE in the wake of the 2008 financial crisis in an attempt to stimulate economic growth. Between 2008 and 2015, the US Federal Reserve in total bought bonds worth more than $3.7 trillion. The UK created £375bn ($550bn) of new money in its QE programme between 2009 and 2012."

With approximately 25 million families in the UK, the cost of the state's quantitative easing program works out at just under £15,000 per family. Someone is going to have pay for that. But the thing is, can you imagine Theresa May held a referendum on whether families would each be prepared to fork out £15,000 in higher prices for the government's money creation scheme. I think we're sure people would vote with a big fat no.

This series of problems can only be put right when the monopoly politicians have on the money supply is thwarted. Only when the state operates by the same ordinances as the market prices of supply and demand will things be better for our children and grandchildren.

If this election is anything to go by, it seems young people's appetite for voting has been seriously whetted, as they came out in bigger numbers than before. Unfortunately what they voted for is more of the same kind of crises but on an even larger scale under Corbyn's Labour. We've engaged the young in politics; now we need to teach them the basics of market freedom, supply and demand, and about the damage politicians have been doing to their future for a long time now.

Monday, 12 June 2017

Of Course Tax Provides Less Value Than Spending The Money Yourself

Ha-Joon Chang's latest pratfall is an attempt to expose the so-called myth that tax is a burden:

"The Conservatives are clear about this, proposing to cut corporation tax further to 17%, one of the lowest levels in the rich world. However, even Labour is using the language of “burden” about taxes. In proposing tax increases for the highest income earners and large corporations, Jeremy Corbyn spoke of his belief that “those with the broadest shoulders should bear the greatest burden. UK needs £15bn in cuts or tax rises to clear deficit by 2022, says IFS. But would you call the money that you pay for your takeaway curry or Netflix subscription a burden? You wouldn’t, because you recognise that you are getting your curry and TV shows in return. Likewise, you shouldn’t call your taxes a burden because in return you get an array of public services, from education, health and old-age care, through to flood defence and roads to the police and military."

Dear oh dear, you really would expect someone who teaches economics at Cambridge University to have a better grasp on why this argument is wrong. But alas, Ha-Joon Chang appears oblivious to the key difference between services received through taxation and services received through private subscription.

Here's the principal difference Chang is missing. Market transactions like curries and Netflix subscriptions are a benefit to the consumer because they get exactly the thing they want when they purchase it. Taxes are not like this - they amount to all kinds of funds being taken from one group and given to another, which ensures that people's spending is not aligned with their revealed preferences.

George's tax goes to pay to prop up the railway networks he never uses, because he prefers to drive (an activity for which he also gets taxed). His taxes go towards paying for many things that are not in alignment with his own preferences: he can work extra hours but end up forking out for increased leisure time of people that prefer to bum around watching daytime television; he can live a healthy and conscientious lifestyle and yet fund health care for people who abused their body far more than he did.

There are countess examples of this kind - taxes taken from pacifists go towards funding nuclear programs they do not support; taxes from sporty people go towards funding gastric bands for the unfit; taxes from ordinary citizens go towards wars to which they defiantly object; taxes from people uninterested in sport go into sporting projects; taxes taken to fund green energy subsidies are taken from people that do not support these ventures; taxes from people that live in urban high-rise apartments are taken to fund flood defences for people that live by rivers in rural communities, the list goes on.

I am not making any comment here about the intrinsic merits and demerits of the tax-funded initiatives, I am simply trying to show that Ha-Joon Chang is confused when he tries to suggest that taxes are about as un-burdensome as our market transactions because we 'get an array of public services in return'.

For the whole purpose of consumer surpluses and producer surpluses is that both buyers and sellers each try to obtain maximum mutual value from the transaction. That is, buyers try to pay as little as they can for something at a price that's furthest away from the most they would pay, and sellers do the same but the other way around.

It is this process that not only creates as much market value in society as possible, it is the process that has given us the greatest human enrichment the world has ever seen over the past couple of hundred years. Contrary to what Ha-Joon Chang thinks, taxes are very much not like this. Yes they do some good, but they also misallocate many resources that would otherwise be spent much more closely in line with what consumers actually want to spend them on.

Thursday, 8 June 2017

The Pollsters Are Missing A Big Trick In Predicting Elections

I was looking at some of the poll responses from members of the public this morning on the news, and thought to myself, the way pollsters poll seems to me to be not the most effective way to gauge the likelihood of a party's share of the vote.

Think about it, the pollsters ask members of the public who they are going to vote for, which is a very limited question because the only information they distil from that question is how that person will vote.

Now, a better question to ask members of the public would be: Which party do you think is going to win the election?

Here's why. When you ask someone who they think will be win the election, their brain will rapidly run a gamut of recall in their mind's library of experiential protocols - sifting through all their recent political conversations, family voting intentions, Facebook posts from friends revealing their party preferences, etc, and draw on a kind of weighted average of those experiences, thereby being able to intuit who they think the likely winning party will be.

That is to say, in asking someone Which party do you think is going to win the election? - as opposed to Who will you vote for? - the pollsters are, in essence, capturing a proxy poll of a much wider part of the demographic, because they are extrapolating from the person's wider social circle. Asking someone Which party do you think is going to win the election? is a little bit like asking them about the voting intentions of their social circle - it's a kind of larger poll trapped inside the body of a smaller poll.

In a sense, the phenomenon I'm talking about is a development of what's known as The Wisdom of Crowds, which is where the average guess of a large selection of guesses usually turns out to be astonishingly close to the correct answer.

This Wisdom of Crowds phenomenon famously came about through scientist Francis Galton (he of eugenics infamy) when he conducted an impromptu experiment at a farmyard exhibition, whereby people were asked to guess the weight of an ox, with a prize being awarded to the person who made the best guess. There were just under 800 guesses, with the average guess being within 1% of the correct answer 1,197 pounds, beating not only most of the individual guesses but also those of alleged cattle experts. This is what is meant by The Wisdom of Crowds.

To qualify that, three things: firstly, it is important that the group members give their answers independently without being influenced by each other; secondly, this works much better if the group has diversity - the more diverse the better; and thirdly, this also works better when there is a correct answer to the question that's easy to ascertain.

Given the foregoing, why, then, should the average of a large selection of guesses by non-experts consistently be more accurate than more educated guesses by individual experts? I think the probable explanation is that when an individual makes a guess or posits an answer, he or she is cluttered with quite a bit of background distraction from the variety of other thoughts, feelings and sensations, and that taking the average over a huge variety of responses may go some way to cancelling out this effect.

In November last year I wrote a Blog explaining why polls keep misleading the masses, and I touched on something that I think is heart of what I'm on about today. I talked about what I felt was good intuition regarding the outcome of the last three big political events (UK Election in 2015, EU Referendum and US Presidential Election). I felt confident about the results quite simply because everywhere I went - be it at work, in pubs, on the Internet - the sense was that there were more people trusting Cameron than Ed Miliband, more people wanting to leave the EU than remain in it, and enough people trusting Trump and/or disking Hillary Clinton to see Trump become President.

Similarly, I think polls that gauged this type of intuition by asking Who do you think is going to win? are the way forward if you want to achieve a much more accurate reading of the electorate's pulse on these matters.  

Tuesday, 6 June 2017

Food Banks Are Probably A Sign That Things Are Getting Better, Not Worse

Yesterday at a hustings, Sheryll Murray, the Tory MP for South East Cornwall sparked outrage by saying she was 'pleased we have food banks' - a claim that invoked the vitriol of the Corbyn supporters in the audience. Much to her discredit, Sheryll Murray responded unprofessionally, encouraging attendees to ignore the people heckling her. However, on the principal point - of her being 'pleased we have food banks' - the audience got it wrong; Murray was quite right to be pleased, and anyone who is apprised of the basic economics of food banks would understand why. 

The topic of food banks has had plenty of nonsense spoken about it over the past few years. Hardly a day goes by without some uncritical politician holding up food banks as a sign of doom and gloom in our country, and using them as a stick with which to beat their political rivals. It's incredibly lazy thinking, because it misunderstands the journey from no food banks to food banks, and how and why it happened.

The first obvious point these politicians miss is that by and large the increased demand for food banks is caused by increased supply - that is, by people's increased ability to donate food and the charity infrastructure to facilitate this. Food banks are an example of Say's Law in action - "Supply creates its own demand", which very often isn't true, but is in this case.

Ask yourself a profound question: why weren't food banks around sooner? I mean, we've traded food for centuries, and we've given to charity for decades, so why weren't there food banks except very recently?

One thing to say is this: while there is no question that food banks are indication of short-term hardship for many (for complex reasons too), they are far less an indication that suddenly half a million people can no longer afford to eat, than they are an indication of increased prosperity, because the fact that nearly half a million people use them each week means that there is increased financial ability for people to afford food donations. Did it never strike you as strange that in a time when state spending is at a record high, suddenly 0.7% of the entire population could no longer afford to eat?

Irrespective of whether or not poverty is on the increase, the number of food bank users is not the right metric to use to determine the number of people in poverty. Increased food bank use does not necessarily mean increased hardship - it probably means increased help for those in situations of hardship.

Let me offer an illustration that will show why. Imagine a village called Poppellville consisting of 100 people. Ten years ago 30 of the people in the village were below the median line and only 2 of them were getting help from food banks, as the food bank scheme was still in its infancy. Fast forward to the modern day, 18 of them are below the median line, and 16 of these 18 are receiving help from the foodbank scheme.

Clearly this increase in people using the food bank scheme in Poppellville is not coinciding with an increase in poverty. In absolute terms, there has been an 800% increase in the number of people in Poppellville now benefiting from food banks over those ten years, while poverty has dropped by 40% in that same time period.

That illustration sums up what's probably the case in the UK. Rather than food banks being an indication of increased economic hardship, they most likely are a demonstration of our increased ability to respond to economic hardship with donations of food for those that need it, and a demonstration of how more and more people's rise in living standards has helped them to be able to buy food specifically for the purpose of donating it to food banks.

Moreover, and this is probably why the lefties really hate them - food banks show how voluntary charity work in the local communities is doing a better, more cost-effective and more efficient job of helping people who have fallen on hard times than equivalent services would be if they were state-provided with the additional costs of the extra layers of state-bureaucracy on top, and party politicians publically squabbling over it like they do the NHS.

* For simplicity's sake, I'm using the woeful definition of poverty that the UK Child Poverty Act 2010 uses - a definition over which I've been critical in the past.

EDIT TO ADD: Here's an analogy I used to elaborate this point to a commenter. Before Paracetamol was invented, people still had headaches - they just had no Paracetamol to buy at the chemist to make headaches better. The introduction of Paracetamol caused lots of people to buy them to cure headaches, but it would be absurd to argue that once we started to see lots of people buying Paracetamol, that that is evidence that people are now getting more headaches. Headaches existed long before Paracetamol, just as hardship existed long before food banks - and neither Paracetamol nor food banks made the thing they were trying to cure more widespread - they just gave people an additional helping hand.


Sunday, 4 June 2017

What We Should Hate Most About Election Campaigns

If you're starting to feel fed up with the electioneering, it's probably because the party leaders are merely churning out litanies of insipid and meaningless phrases, with all the wit, erudition and charisma of a clapped out old moped sold to you for a fiver by a buck-toothed wheeler dealer called Terry.

For me, the worst thing about run-ups to general elections is that they provide a daily reminder of how politicians are trying to sell us things we shouldn’t want to be buying. Every day we hear lots about what politicians can do for us – create jobs, invest in the economy, make prices higher or lower – but the reality is, the best thing the government can do for us is to promise to do much less, and then stick to that promise.  So much so, that the government should only provide services that the market cannot provide (which, as I’ve argued in many previous blog posts, isn’t very much).

Let me explain why when the government provides things the market can provide we all lose out. This principle is what we might refer to as the deadweight losses of market interference, which basically means the costs politicians impose on us in what would otherwise be unimpeded economic transactions.

Suppose I am willing to pay no more than £12 per hour to have some work done, and the workmen at the lowest rates are willing to do the work for anything over £10 per hour. That being the case I should have success in finding someone to do the job.

But once the government imposes 20% income tax, things change, because now the most the workmen can earn from me is £9.60 per hour, which means they'd be unwilling to do the job for me. The minimum wage law, therefore, stops otherwise mutually beneficial transactions happening.

The same is true of VAT. If I can produce a bicycle for £100 and John is willing to pay no more than £250 for it, then a bicycle will be produced. However, once tax is introduced onto a good, things change, because the retailer takes responsibility for the tax, but passes it onto the consumer in the form of higher prices. If the cost of a bike is £100, and the selling price is £250, the retailer is only responsible for paying VAT on the extra £150, which means the price of the bike is now £280, and John no longer buys it.

The more the government interferes with taxes, the more sales they stop from happening by impeding the supply and demand equilibrium point between what will be mutually valuable to buyers and sellers. In short, government taxes cost the nation in terms of transactions that never take place and opportunities that never materialise. When politicians tell us how they will invest in our economy, what never gets acknowledged are all the intangible costs – the value that never gets created because of those deadweight losses.

It’s not easy to measure the deadweight costs of taxation, but I’ve done a bit of research on what expert economists think, and it is thought to be something like a rate of 30%. In other words, for every £1 raised in taxation you have to add on about 30% to the cost of doing something.

So a social care bill, a child’s education and medical expenses that cost, say, £200,000 over a 15 year period would have cost around £125,000 in the private sector. Not only does that mean the additional state-layered bureaucracy costs another £75,000 for the same level of services – it also means there was £75,000 worth of GDP not created in our economy as a result.

Given that the cost to the consumer in having money taken out of their wages and getting it back in the form of state-supplied services is approximately an additional third of the whole transaction value, we should not be too enamoured by politicians’ promises that they want to do more for us.

Finally, I'll leave you with this rather telling thought. In business, a lot of firms try to sell us extras we don't really need in the form of hidden fees - admin charges, extra consumables, additional packages and insurance add-ons, etc - which is a dead giveaway that these aren't things we'd often choose to buy if they were offered in a clear and transparent way. 

You might like to consider that taxes follow a pretty similar template in both their complexity and stealthiness, and that that probably tells you a lot of what you need to know about the kind of things politicians are trying to sell us, and the appetite we'd have for them if they were offered in a clear and transparent way.

Thursday, 1 June 2017

A Fairly Good Policy - It Just Needs A Bit Of Tweaking

Generally I should imagine I share the same kind of views as the guys at the Adam Smith Institute when it comes to land value tax - that it is far from perfect, but better than many of the taxes we currently have. Sam Bowman has an article out today on the subject of land value tax, which is by and large on the money - but he does fall foul of a couple of blips in his reasoning, which I'll touch on in a moment.  

Firstly let me explain the plus points of land value tax, and why it is one of the least bad taxes. Some taxes hurt people more than others, and it's not always the case that the more you are taxed the more it hurts. Consider these two hypothetical taxes, for example:

Tax A: Shampoo is taxed at £0 per bottle.
Tax B: Shampoo is taxed at £10,000 per bottle.

Under Tax A, everyone pays zero. Under Tax B, nobody can afford shampoo, so everyone still pays zero. But Tax B hurts us more because it leaves us with greasy and itchy hair.  

Admittedly, that hypothetical example is an alarmingly simple one, but the same wisdom extends throughout the economy: tax doesn't just hurt in terms of what you pay; it hurts in terms of negative things you do or don't do when tax enters the equation. If you tax something, you generally get less of it. Tax ice cream consumption and people eat fewer tubs of ice cream, tax incomes and some people work less, tax profits and entrepreneurs make fewer investments.

For this reason, some people think land value tax is one of the least harmful in terms of the above criteria. Land value tax is a tax on the value of land irrespective of what has been built on it. Because the supply of land is fixed, many argue that taxing land is the least distortional source of public revenue. It was certainly liked by many great economists, from Adam Smith to David Ricardo to Milton Friedman. Institutions like the IMF, the OECD and the IFS’s Mirrlees Review have also claimed to support it, at least in principle.

The good things about it are it doesn't dissuade economic activity - the richer tend to have more land than the poor so will contribute more, and it's an uncomplicated tax because it is hard to evade or avoid, and fairly simple to administer.

Unlike the Labour Party, who just want this to be yet another tax, a better way to introduce land value tax would be to bring it in as a replacement for taxes like council tax, business tax, stamp duty, and so forth, with tax being linked to the value of the land you own.

But like all taxes, however good, it is also imperfect. For example, some people are not hugely wealthy but own land (and the house on top of it) in expensive areas. It is not ideal to tax them based on the rental value of land if they can't afford the tax.

Here's how I would work it
Despite its imperfections, I have my own ideas about how it could work, at least as a kernel of a suggestion. This is how I would pilot its introduction. Every piece of land in the UK is assessed for its rental value, based on everything from location to raw materials, and owners of the land pay a proportion of that value in tax. So a piece of land in Mayfair will be most costly than a piece of land in Ipswich.

To understand why this is so important, let me give you an idea of how the land lies (pun intended) at the moment. The UK is 60 million acres in size, and the population is 65 million people, which equates to just under 1 acre per person. However, the land is not divided up to equate to 1 acre per person. Less than 1% of people own 70% of all the UK land (mostly comprising Aristocrats, Baronets and the Landed Gentry). Yet the average Brit lives on 340 square yards which totals about 8% of the entire land, which would translate as 12.5 people per acre instead of 1 person per acre.

Let me tell you a stat I learned from Dominic Frisby: apparently each UK home pays an average of £550 per year council tax (to live on 7.7% of the UK's land) while each land owning home receives just over £12,000 in subsidies, and 158,000 families own 41 million acres of land while 24 million families live on just 4 million acres.

That means that we'd have a tax system that in some way levies people according to their land value (so as is already desired cross-nationally, the rich will pay more tax than the poor).  Then each political party could commit to a spending plan, lay down a figure (say the Conservatives quote £500 billion per year over a 5 year period), and then work out the rental value of the land, charging a proportion of that in tax sufficient to cover their spending costs.

Suppose the total land value is £5 trillion, then for a spending plan of £500 billion the annual tax ratio will be 10% of total land value, divided up by who has the most land. The tax wouldn't dissuade work or hamper innovation - it would be the only tax collected.

And when you think that an acre of unimproved land worth a few thousand pounds can be developed to be worth a few millions, it would incentivise people to make the best use of that land. However, this is where Sam Bowman starts to get in trouble with the idea:
"One false claim made in favour of the LVT is that it would force the land to be used ‘more productively’. But there is already a sort of ‘tax’ on owning land and not using it as productively as possible: opportunity cost. If you choose to use your land as a garden instead of a block of flats to rent out, you are ‘paying’ the cost of doing so in the rent you’re forgoing."

No, this is wrong wrong wrong - and quite unlike Sam. There are a number of glaring errors here. The first one is that just because opportunity costs exist, that does not mean they are strong enough to change the behaviour of preventing actual costs. If you don't build on your land you forego rent in terms of opportunity costs. But if you have to pay tax in order to keep the land undeveloped, then the costs play far more in your incentives, quite aside from any opportunity costs.

Sam's argument is the equivalent of saying: Every time John parks his car under the tree in his garden he comes out to find it covered in bird poo (land value tax). He also forgoes the chance to park the car one mile away and get some exercise walking back (opportunity cost). Because there is already the opportunity cost of parking under the tree in terms of foregone exercise, the bird poo will not be enough of an incentive to park the car away from the tree.

The other major error from Sam is when he says "If you choose to use your land as a garden instead of a block of flats to rent out, you are ‘paying’ the cost of doing so in the rent you’re forgoing". This is almost certainly false in the case of most people with unimproved gardens (unimproved is the term for land that has not been developed to increase its value). The reason being, it ignores the major costs associated with making yourself able to earn money from renting property - namely the capital required to build the flats on your land, the planning permission, and various other use of resources. You can't talk of opporunity cost of unearned rent without factoring in the capital costs - costs that are not available to the vast majority of home owners.

Then we move on to Sam's next dodgy statement, where he says that future taxes will capitalise into the value of the land today and be entirely borne by the land owners, not the renters. He's right that taxes will rise due to land value inflation, but there is no obvious reason I can think of why renters won't bear some of the cost of the taxation, because we already have a tax system where consumers bear the brunt of most tax increases. Corporation taxes, sales taxes and minimum wage taxes are largely borne by the patrons of the business to which they are associated, and that's what would happen in the rental sector too. Any land value tax on homeowners would be reflected in the rents landlords charge their tenants. I have no idea why Sam Bowman isn't seeing this.

You may therefore think that land value tax will push up rents - which it might in the short term, but that may well be offset by more properties available on the market as land owners are more incentivised to develop their land - so much so that long term this could actually drive down rent prices. If those 0.6% of the population that own the land want to retain it they can pay the community for it; if they don't they can sell it to others who will put it to good use.

Another benefit of the land value tax is that there would also need to be far fewer people employed by the government to collect taxes, and the system under which tax operates would be much simpler - all that would be required would be assurance that land is being valued properly.

Incidentally, Singapore has a tax system much more to my liking - an income tax that rises incrementally but has a limit of 20% for those earning over S$320,000, it has a 7% vat rate and no capital gains tax or corporation tax. And yet the World Economic Forum rates it as one of the world's best country in terms of a competitive economy, infrastructure and economic freedom (there's a pattern there)

In summary, while no tax is perfect, there are few good reasons why land value tax is one of the least bad taxes, on account that it: taxes consumption not productivity, incentivises land owners to make the use economic use of their land, spreads wealth across the country with the richer picking up a bit more of the burden, is a tax that's hard to avoid, evade or conceal, is fairly straightforward to administer, keeps a check on government spending, and taps into lots of the 'uncultivated value and unearthed economic growth that's still in potentia.

Land value tax is a tax on consumption not on production, which is a preferred way to tax people because it doesn't deter productivity. The only thing is, we should push this much further - we should work towards land value tax being the only tax in the UK, and double it up with national policy where a government has to promise to govern with tax revenue that does not exceed the total land value divided by their public expenditure pledge. That way, there'd be a tax system that encourages economic growth by encouraging productivity, and at the time holds the government to account on their spending.