Don't Try To Fix What Isn't Broke

I didn’t plan on writing a Blog post this lunchtime, so let’s make it a quickie. Just now I’ve been listening to Jeremy Vine on BBC Radio 2 lightly grilling one of the executives of one of the big six energy firms (sorry, didn’t catch the person’s name, nor his company, as I missed the beginning). The issue is based on this bit of news - quoted from The Guardian:

“The energy watchdog, Ofgem is predicting that energy suppliers will make £106 per household over the next year – almost 5% more than it forecast a month ago. Dermot Nolan, the chief executive, said he wanted to see this reflected in lower bills as falling wholesale power prices increase company profit margins. "If the market is operating efficiently, you would expect to see competition pressing down [household] prices."

Yes and no. While it’s true that if the market is operating efficiently you would expect to see competition pressing down prices, that fact is also counterpoised by the reality that scarcity of supply chokes the market mechanism more than most people understand. Due to the market knife-edge on which energy supplies sit, energy companies cannot easily risk insolvency by simply lowering customer prices conterminously alongside wholesale price drops, because energy companies do not buy in accordance with the fluctuating wholesale prices we observe in the domestic sector – they make huge investments over several years, during which the market is susceptible to significant fluctuations (this alone shows the idiotic short-sightedness of Ed Miliband’s popularity-mongering energy price freeze proposals).

Competition makes an industry healthy, but I have a feeling that, while it’s completely understandable, in the energy industry consumers are often to blame for not making the most of competition. In the food industry, if Budgens becomes too expensive, people switch to Tesco; if Tesco becomes too expensive they switch to Aldi. It is easy to switch food providers – all you need to do is drive to a different supermarket. But while it is similarly not that difficult to switch energy providers, the time, research, asymmetry of information, and technical nous required (many people still don’t operate a computer) to take full advantage of competition is often prohibitive unless people are willing to invest the time to be price sensitive (a luxury not everyone has). If a survey was conducted that recorded the number of people who’ve switched supermarkets compared with the number of people who’ve switched energy suppliers, I’ll bet the former is astronomically higher than the latter.

Let me paint you a Guardian-reader fantasy that will probably seduce and titillate: Ed Miliband becomes Prime Minister next year and passes a law insisting that all providers enable customers to benefit from similarly low prices. That would be better for the energy market, right? Wrong. Imposing the lowest tariff on your own consumers stops competitors offering more competitive (and innovative) strategies. And not being able to attract new customers at a discounted rate relative to your existing customers disables the very quality of competition in the first place. Also, energy suppliers would not be able to compound their discounts to larger customers whose energy use far exceeds the ordinary domestic home. Uniformity drives out the best methods of ingenuity – and the continual misunderstandings about energy prices, profits, and what drives them, leads to this fruitless “If it’s not broke, don’t fix it” preoccupation.

Move Away From The Economic Right & You Move Towards The Economic Wrong

Paul Krugman has one of the most prestigious column spaces in the world - he writes the principal economics pieces in the New York Times. But although in an esteemed role, and with a Nobel-winning status, he does write quite a bit of guff, including this whopper from this New York Times article a couple of days ago:

 “There is, however, one big difference between corporate persons and the likes of you and me: On current trends, we’re heading toward a world in which only the human people pay taxes.”

 

It’s hard to see how someone who understands economics as well as Krugman could make such a misjudged statement. We already live in a world in which only humans pay tax, and we always have done. It doesn’t matter that a corporation bears some legal resemblance to a person: tax always means that some humans have less and some have more, whether that tax is corporation tax, income tax, value added tax, road tax or whatever kind. It’s true that corporation tax hits the pockets of humans in a more indirect way, but it doesn’t change the fact that all tax is paid for by humans (see my blog post The Best Way To Get More Tax From Corporations Is To Stop Taxing Them for a fuller analysis of this)

 

The only thing to which I can ascribe Krugman’s ill-conceieved comment is his gradual gravitation over the years further and further to the left – he’s falling for the leftist rhetoric about the ‘evils’ of success in business. This next little gem gives further indication of this:

 

“The federal government still gets a tenth of its revenue from corporate profits taxation. But it used to get a lot more — a third of revenue came from profits taxes in the early 1950s, a quarter or more well into the 1960s. Part of the decline since then reflects a fall in the tax rate, but mainly it reflects ever-more-aggressive corporate tax avoidance — avoidance that politicians have done little to prevent.”

 

Hang on – Krugman starts by lamenting the shift from corporate person tax to individual person tax but then goes on to lament the increase in corporate tax avoidance. As I argued in my Blog link above, the exact same solution to corporate tax avoidance is the very thing that Krugman is lamenting – a shift from corporate tax to individual tax.

 

Besides, a mere shift from corporation tax to individual tax doesn’t, by itself, amount to a loss in government revenue. If 20 years ago Bob as a company shareholder receives a £50 dividend but pays 25% tax, the government gets £12.50 in revenue. If in the present day Bob’s corporation (and thus dividend) is taxed less but Bob’s personal income more, he gets an increased dividend but pays more income tax. Suppose he now earns £75 dividend, but the government taxes him more to get their £12.50 (adjusting for inflation) – government revenue is no worse off.

 

Lastly, it is presumptuous to assume that this shift in tax “reflects ever-more-aggressive corporate tax avoidance”. It may do, but it doesn’t necessarily – and as Krugman didn’t see fit to elaborate on how he knows this, he must stand accused of making a hasty presumption. It is quite possible that the decrease in corporation tax revenue is actually down to that tax being sought by other routes. Corporation tax may have shrunk as a percentage of net tax collected, but been offset by various increases in percentage of net tax collected in other areas (say for example, in income tax, in National Insurance, in VAT, and in pensions).

 

 

 

 

 

 

Orwellian McChickens Are Coming Home To Roost

Ban supersized foods, says health committee chairman.

This is the kind of headline that makes people like me shudder with the spectre that our State hegemony keeps growing and growing. There seems to be no end to the extent to which the State wants to interfere in our daily (and let's not forget, mutually voluntary) activities. Conservative MP Dr Sarah Wollaston (a former GP, so clearly completely unbiased), wants supersize junk food portions banned, because according to her, the state has a duty to intervene to protect current and future generations from unhealthy habits threatening to shorten their lives. From The Telegraph:

"The Government has a 'duty to intervene' and outlaw supersized portions to protect children from Britain's obesity epidemic, says Dr Sarah Wollaston. The former GP has called for a direct ban on “supersized” foods and drinks, so that manufacturers would be restricted to producing chocolate bars, junk food meals and fizzy drinks in standard sizes. “Supersized” food and drinks should be banned by law in a bid to combat Britain’s obesity epidemic, the new head of the Commons health select committee has said."

When are politicians going to get the point? They should not get to dictate which voluntary free exchanges we undertake. We should enjoy that liberty – the very least of all liberties. We've already been taxed once on the earnings, and we are going to pay tax on the transaction - so for goodness' sake stop trying to dictate our actions and repress our liberty.

That's the normative issue - but there's another issue too - a point of simple logic. If the size of the portions are cut down, those who won't be filled up by them will simply buy two regular size portions instead of one supersize, or they will buy a few extra bits until they are no longer hungry. I'll wager that two portions of regular size fries contain more fries and cost more money than one supersize portion. Even aside from the taint of its oppressiveness, Sarah Wollaston's policy may well increase people's junk food consumption and decrease their finances at the same time - in both cases, the very opposite of what she wants to achieve.

What's With This George Monbiot Then?

Every now and then, albeit not often, someone tells me I should check out George Monbiot’s writing. Apparently, according to the green/economic left contingent he is the 'go to' guy for their cause, because he is one of the few who writes intelligently and researches carefully. Apart from having one brief look a few months ago, when he (or someone associated with him) appeared to distort facts about historical global temperatures dating back tens of thousands of years, I’ve thus far resisted. By accident, though, I stumbled upon one of George Monbiot’s recent Guardian missives bemoaning the fact that many of us are not worshippers of Gaia, the Greek eco-preserving Mother Goddess. So, I decided to give him a second look. I was pleased to see he was light-hearted enough to start his column with a joke:

"All the major parties and most of the media believe that we would be better off with less regulation, less discussion and more speed"

Hahahaha – very good. Oh wait, hang on, it appears he’s not making a joke at all – he’s being deadly serious. So ‘all’ the major parties (by which he must mean the Tories, Labour and Liberals – a triumvirate that stretches right back to the 17th century in various guises) believe we would be better of with ‘less’ regulation. The only way such a statement could stray into even the same territory as the truth is if we pretend that in this case 'less' means 'more'. Other than changing the meaning of words, the contention is preposterous - our major parties are continually thinking up new ways to regulate, and suppress our ability to engage in mutually beneficial transactions without being impeded by some new government protocol.

But this is what happens with relative comparatives - they skew your overall interpretation if you sit at one extreme - even moderates can seem like they are extreme. To a 3 foot 3 midget, even someone who is 5 foot 6 is seen as tall. To a basketball player, even someone who is 5 foot 10 is seen as short. This is what's happening with George Monbiot's interpretation of the main parties. If height illustrates freedom in the market economy, and being 6 foot 7 is equivalent to believing in the prosperity of the free market of supply and demand (with the necessary light regulation) then George Monbiot is seeing the free market like a heavy regulation-friendly 3 foot 3 midget who is claiming a 5 foot 6 man to be tall.

However, this comment below is the biggest whopper in his article – and as it’s the postcard version of his main point, I think it will suffice:

Planning laws inhibit prosperity. That's what we're told by almost everyone. Those long and tortuous negotiations over what should be built where are a brake on progress. All the major parties and most of the media believe that we would be better off with less regulation, less discussion and more speed. Try telling that to the people of Spain and Ireland. Town planning in those countries amounts to shaking a giant dustbin over the land. Houses are littered randomly across landscapes of tremendous beauty, and are so disaggregated that they're almost impossible to provide with public services. The result, of course, is a great advance in human welfare. Oh, wait a moment. No, it's economic collapse followed by mass unemployment. Spain and Ireland removed the brakes on progress and the car rolled over a precipice. Their barely regulated planning systems permitted the creation of property bubbles that trashed the economy along with the land.

Smelling a rat with regard to such poor reasoning is a classic example of what it means to 'think like an economist' (to paraphrase Tyler Cowen) - one is just able to spot departures from the patterned normalcy that embed the reason and rationale behind economic thinking. Or to put it more crudely, once you're used to the difference between good arguments and bad ones, spotting bad ones like this crass distortion of the facts comes pretty naturally. Knowing one simple thing - that planning/green regulations hike up housing prices and increase the chances of a bubble is enough to tell you that Monbiot is talking nonsense.

In fact, his comment is so bad that I had to do a double-take and re-read to be sure that Monbiot was actually arguing that the policies in Ireland and Spain of freeing up the supply of land and lifting regulations brought about “economic collapse followed by mass unemployment”.

Here's the truth. You know how much it annoys you when some chump tells you that ‘Correlation does not imply causation’, when you’ve made not the slightest suggestion in your blog or article that it does? Well in Monbiot’s case here, someone actually does need to point out to him that he’s got his causation and correlation mixed up.

Just because Spain and Ireland have relaxed planning regulations and financial busts does not, of course, mean that there is an A causes B causality here. The causality is, for the most part, a four letter currency problem, starting with ‘E’, ending with ‘O’ and having a ‘U’ and an ‘R’ sandwiched between them. The global financial crisis, international trade issues, burst housing and asset bubbles, and lots of sloppy eurozone horseplay where interest rates favoured larger economies (like Germany) were the primary causes of the crisis in the european nations’ economies (including Spain and Ireland). To suggest, as Monbiot does, that the cause was fewer planning/green regulations is beyond silly – not just because it is counterfactual, but because it is illogical too (as I said a moment ago, lifting regulations is better for housing supply, prices, jobs and investment, not worse). 

If fewer planning/green regulations were the primary cause, then we should have expected to see Greece, Portugal, Slovenia, Slovakia and Cyprus escape the crisis, as their regulatory laws are for the most part not as ‘barely regulated’ as those of Spain or Ireland.

Needless to say, if this kind of sloppy thinking is indicative of George Monbiot’s wider work (and I’m not asserting that it is), I shall not be inclined towards too many more of his articles any time soon. But yet in sharp contradistinction, that would go against another good maxim - that it is not good to not read someone just because you think you'll disagree with them.

* Photo courtesy of The Guardian

A Better Way To Shop For Schools

After posting my NHS blog and my smoking blog to demonstrate the brilliance of the free market, I'll finish what has turned out to be a trilogy with education - another good analogy for the quality of the free market and the impediments of State-run institutions. Most children attend government-run or government-funded schools, with a minority attending private schools.

The basic problem with our State-funded education system is that market competition does not really exist, so there is little incentive for schools to win business. If HMV fails to provide the goods and services customers want, it will go bust. Other providers, like Amazon and Play, will procure their customers. The competitive free market explains why incentives are plentiful, and why every product under the sun has improved over time yet also proved lower in cost. This is what is so marvellous about the market of supply and demand - people vote with their wallets, and firms that don't improve the quality of their goods and the allure of low prices will struggle.

Schools, on the other hand, are not currently being made efficient by such market forces. A failing school doesn't lose many customers, and its failure is likely to result in more taxpayer expenditure in the form of fines or more central government money thrown at it. This, on the whole, is the distinction between private and public sector institutions: injected finances into private sector services are usually an indication of success; injected finances into public sector services are usually an indication of failure. Not always, but usually.

Let's look at clothes as an illustration. Consumers have a vast array of desires and needs when it comes to what they wear. Evidence of this is found in the fact that the supply market for clothes is multifarious in its variety of sizes, colours, styles and prices. When market competition is replaced with government funding, consumers' preferences take more of a back seat, with politicians' preferences firmly in the driving seat.

Some people argue that the problem with a free market ethos in education is that if you're from a disadvantaged background you probably have less of a chance of thriving in a school environment, and the free market is only likely to make this worse. The reality is, the opposite is more likely. Children from disadvantaged backgrounds clearly are failing the current curriculum - but that suggests that the curriculum is not designed to tailor to their needs. More of a free market ethos would be the medicine to the ailment, not the poison. The evidence is that the 'one size fits all' government method is failing disadvantaged pupils. An education system that had the diversity to cater for a wide range of needs and abilities would be much better. In fact, my school serves as a good microcosmic example - it had a diverse range of pupils from all sorts of backgrounds, and many good teachers whose speciality was getting the best out of pupils who weren't so naturally gifted or pupils whose background was not conducive to academic excellence.

The injection of free market qualities would help all kinds of pupil at a wider level. Of course the market isn't an education panacea - there will always be problems. But this is because parents and social background play a lot bigger role in shaping youngsters than teachers and education authorities do. Pointing to the problem of young people in general when they are disadvantaged is not a criticism of the now departed Michael Gove's school policies. There are many cases of benefactors investing in free schools that contain lots of these so-called disadvantaged pupils, and the indications are that they are going to outperform State-schools (charter schools in America are following a similar pattern)

Go back to my clothing illustration and imagine how much better things would be if parents had the kind of supply of schools that clothes consumers have for clothes shops. I can get a lot of my shirts from High & Mighty because I am 6ft 7 and full of style and sexual charisma ( ;-) ). If every clothes shop was like Primark or Gucci, then clothes shopping would be hell, because variety is what makes us all catered for. Similarly, children from disadvantaged backgrounds - children so obviously not engaging with the current State curriculum - would be much better catered for in a market in which providers could specialise in tailoring their curricula to their needs.

I met a lady on benefits recently whose food is funded by Tesco vouchers. The government provides those voucher funds but it does not tell her which foods to buy, because it doesn't know her preferences better than she does. Similarly with education; it should be supplied by schools competing for the patronage of parents. Schools that had to win the business of parents would be an awful lot better than schools that received business irrespective of quality. That's as a much of a sine qua non as saying that a nationalised supermarket or clothes store would be lower in quality and less customer-focused than private ones.

* Photo courtesy of myuniversitymoney.com

On Left & Right Politics

I was interested to hear a man giving feedback on my Philosophical Muser Blog recently - he said "It’s probably fair to comment that I find myself a good degree further to the left than you". This is interesting because, although this Blog expresses strong libertarian sentiments, in actual fact, when it comes to issues on which one can lean to the left or the right, there are as many of them on which I lean to the left as there are the right.

Before I tell you about me, let me first talk about the rest of the UK. As far as the UK goes, the political landscape is roughly this: the average UK citizen is ideologically to the left of the average politician in some areas, and to the right on others. Most UK citizens are more to the right than the establishment on things like immigration, welfare, foreign aid, green and global climate issues, capital punishment and homosexual unions (albeit only very slightly on the last one). But most UK citizens are more to the left than the establishment on things like free market economics and State-run schools, hospitals, banks, and so forth. By ‘average citizen’ I mean if you picked a person out at random he or she has a higher probability of being to the left of the establishment on, say, free enterprise and the merits of privatisation, and to the right of the establishment on, say, green issues and the benefits of immigration, than the other way round.

My position is this. I'm to the left on all the things on which I think it's good to be on the left - immigration, foreign aid, homosexuality, assisted suicide, home office issues, and challenges to orthodoxy - as well a being a champion of free speech and equality of opportunity. And I'm on the right on all the things on which I think it's good to be on the right - namely economic issues to do with individual libertarianism and the free market, and green and global climate issues – as well as wishing for a tough attitude towards deporting or incarcerating hate preachers and religious extremists who don’t respect British values. For the record, I tend to bathe in the milk of centrality when it comes to health and education - teetering somewhere between championing increased market forces, and comfortably accepting the merits of retaining central funding until things can more easily change.

If we leave aside the green and global climate issues, which involve a lot more commentary that we needn't go into right now (but will at a later date), you'll see that the winning left battles outnumber the winning right battles - both in the views I hold, and also in what the average citizen holds - even to the point that in many of those cases (in particular, immigration, foreign aid, same-sex marriage, abortion, and assisted suicide) it can be positively unfashionable and reputation-hindering to take a right-wing position nowadays, despite people's overall preferences to which I just alluded. Let me separate into groups the issues on which I'm on the left and the right, and in brackets I'll put where the average citizen disagrees with me.

Left

Immigration (disagrees)

Same-sex marriage

Foreign aid (disagrees)

Assisted dying

Home office issues

Right

Individual libertarianism (disagrees)

The free market (disagrees)

Green and global climate issues

(State run health and schools deliberately omitted)

Note what's going on here. The left issues on which the average citizen and I agree are issues that do not have quite so much electoral importance, so they are not big on politicians' agendas. For example, it's rare to find anyone who doesn't like the idea of a State-run home office. And while they crop up sometimes, issues surrounding same-sex marriage and assisted suicide are pretty unanimously supported once religious extremism is out of the picture, to the extent that there will be pretty trenchant criticism levelled against those who do not support both. Given that the average citizen is quite far to the right on immigration and foreign aid (hence their disagreement with me) politicians feel compelled to pander to this by trying to appear tough on immigration and giving far too little of our money to foreigners who need it far more desperately than we do.

On right issues, while most UK citizens are more to the right than the establishment on green and global climate issues, it's not by as much as you might expect – which means that politicians have to act a bit more green-conscious than they actually are (there are three other advantages to this. Firstly, being green-conscious gives the impression of being a caring, mother-nature loving-type party, and it stays slightly more electable in the teeth of Green party opposition. Secondly, it gives them licence to get more money out of the electorate through green taxes. And lastly, by appearing green-conscious they guard against losing more votes to the Green party).

As I said, the most fashionable positions have been adopted by mainstream politicians - they are fervently left-leaning on same-sex marriage, abortion, euthanasia, and state run health and schools, and home office issues, whilst being demagogic on issues like welfare, immigration and green and global climate issues. Foreign aid is a bit different, because to be genuinely left wing on helping the needy involves passionately standing up for the people who actually are the neediest in the world, which are people in the developing world, not in the UK. Whereas when it comes to helping the needy, most people's continual primary preoccupations are centred on people in this country, which although not ignoble, exposes them as being not genuine economic left wingers, but purveyors of ethnocentric demagoguery.

Economics is different

What we see, then, with the above are many issues that play bit-part roles in the long-running political drama that endures from election to election. The big exception, and the one not yet covered, is economics, in the shape of individual libertarianism and the free market. It is economics that forms the main basis of the divide in politics, and it is usually the state of the economy that has the biggest bearing on the general election. If economics is the central plot in our political dramas, it is understandable why when it comes to choosing sides there is still such a polarity, despite the economic war being won by the right long ago. It is also understandable why, despite my being left wing on most individual component issues, the commentator on my Blog mistook me for being a generalised right-winger.

My big issue with the economic left is roughly as follows - it is the misrepresentation that needs correcting. It is amusing to see how often leftists insist that capitalism causes huge inequality, poverty and ecological destruction (they are the three big supposed indictments against capitalism). It's amusing not because it's a touch-and-go issue that swings both ways, but because it is the complete opposite of the truth. What causes inequality, poverty and ecological destruction in terms of the economic argument are situations that produce impediments to free market trading, namely governments running dictatorships or meddling in areas that they just don't understand. Governments meddling in the supply and demand system of free trade are like alchemists trying to meddle in a chemistry lab - they so often don't understand the business in which they are interfering, and they have only erroneous assumptions to bring to the table.

The actual situation is that as long as the fundamental anti-monopoly regulations are imposed on an otherwise pretty much laissez-faire free market you are all but guaranteed (through price theory) to facilitate the most rational, incentive-driven allocation of resources possible, as well as minimising global inequality, lifting masses of people out of poverty, and maximising the successful co-existence of humankind and the natural world.

With other issues, if you depart from known facts and produce counterfactual rhetoric that distorts the truth and ignores logic you end up (rightly) looking like a pillock and being the recipient of deserved ridicule. Despite the right winning the arguments long ago, it is not only seemingly still credible in some quarters to be on the left, it is often positively admired and encouraged. Many leftists have absorbed an anti-capitalist sentimentalism whereby the free market is seen to be a bogey in the face of fair redistribution of wealth and attainment of opportunity.

As we’ve seen in areas like immigration, same-sex marriage, foreign aid and euthanasia, the left has much merit, and has won many battles. But economics isn't one of them. Yet despite this, the present day culture has many people arguing from the left in ways that beggar belief. I'm a free market, right-leaning libertarian on economics, but it would seem from the opposition one sees that out of all the individual considerations one's economic ethos is the biggest definer of one's perception of others. It's curious that if you're right wing on issues like immigration, foreign aid, homosexuality and euthanasia you're often seen as illiberal, uncaring and prejudiced, and certainly in the minority in the UK. Yet those who champion libertarian principles pretty much feel that way about those on economic left but somehow they've got away with it being more fashionable. 

If the left has clearly lost the economic battle, what else is behind their mistaken ideology? I have an idea - their mistake in erroneously defending leftist economics is that so many of the other left and right issues have been (rightly in my view) won by the left so they assume the same must be true of the economics. In other words, because the left has won the battle in immigration, foreign aid, homosexuality, euthanasia, and (by mutual consensus more that watertight economics) entitlement to State-funded welfare, banking security, a health service, education, social services, subsidised travel, road maintenance, an old age pension, legal justice, a police force and the armed services, it gives some people the false impression that it has won all the battles, including those of economics and green issues. In fact, I'd wager that a lot of people don't even know to draw a distinction between the many different ways of leaning to the left or the right - I'll bet if you asked most people about their left/right leanings they would assume that if you're left wing on the first issue that springs to mind then you must be left wing on all issues.

It's important to see that I'm not unmindful or unappreciative of the kind of socialist mentality the left is endorsing - in fact, in terms of ethical values there is much to endorse. But despite those ethical values, the big problem that undermines the economic left is that in a great many parts it contradicts facts. The challenge therefore, is to find a way to incorporate the qualities of a kind of socialist-individualist-libertarian triumvirate at the personal level with the qualities of the free market and its concomitant mechanism for price theory to efficiently balance supply and demand.

The 'Cost Of Living Crisis' - What Miliband Doesn't Want You To Know

With the recently announced improved state of the British economy, the reliably terrific Jeremy Paxman, in one of his last great moments on Newsnight, gave Labour's Shadow Treasury MP Shabana Mahmood a bit of a grilling on how her party can keep attacking the Tories in light of these evident improvements. Her answer resembled those popular soundbites we hear from Ed Miliband, Ed Balls and Rachel Reeves about how the current improvement is not enough because there is still a 'Cost of living crisis' being felt by many poor working and non-working families. Ed Miliband, in particular, is continually talking about a 'Cost of living crisis' - he's using it as his tactic to attain popularity in the lead up to next year's general election, claiming himself to be the only leader that understands the situation of "Ordinary, hard-working families" (another popular soundbite).

Now while I have no wish to deny that there are many people struggling in Britain, and too many still falling on hard times, I've no idea what a cost of living crisis actually is in terms of a political statement. But then I'm in good company because neither does Ed Miliband. I know what it means for people to struggle to pay bills and be short of cash, but that doesn't give any clear exhibition of what a 'Cost of living crisis’ is, or why that should be a justifiable attack on the Conservatives. I suspect Ed Miliband isn't really that bothered about what the term actually means - he uses it as a pre-election tool because he knows it makes him sound empathetic and caring and in touch with the people.

But even if we give Ed Miliband the benefit of the doubt and accept that he does care and is concerned - it's not doing his political credibility much good trying to criticise the government in one of their sunnier moments with impetuous allusions to a so-called 'crisis' that no one can really define. That is, because the term is so evidentially ambiguous, no one would be able to tell what constitutes a 'cost of living crisis', nor could they tell when such a crisis could be claimed to be over or still apparent, or much less what caused it in the first place, and what caused it to be over. The danger, however well-meaning, is that instead of good policies, politicians end up relying on ambiguously defined popularity-winning appeals that they can keep in their political artillery and use whenever they want.

What does it mean for the cost of living crisis to be over? That's a question I'd like to see Ed Miliband answer. He would no doubt reel out some demagogic rhetoric about "Every family in the UK having enough food to eat and enough money to pay their bills", but that's far too complex and subjective and ambiguous to be used in any meaningful way. As an illustration, consider two similar memes that have made it into common parlance - 'the war on terror' and 'the war on drugs'. These terms are metaphorical abstractions that convey a sentiment, but there is no clear demarcation line to tell us that the war on terror is over or that the war on drugs has been won. Those terms carry no power beyond analogising a conveyance of popular feeling, which is that fundamentalist Muslims are bad and dangerous, and that drug use has dire consequences for many.

Suppose (heaven forbid!) Ed Miliband is Prime Minister next year and declares a 'War on the Cost of Living Crisis", he would no more be able to tell us what it means or when it could be construed as being won than George Bush or Barak Obama could on the so-called 'War on Terror'. I don't mean that these terms are entirely without utility - but it is very evident that such terms are too low-resolution to be used pugnaciously against the current government in the way that Ed Miliband keeps doing.

Ed Miliband also makes his case by conveniently leaving out half the picture. He complains that prices are going up more than wages, but fails to allow for the fact that a steadiness is wage rates is what is helping the employment levels. Quite why increased prices are a valid criticism of the government is beyond me, as prices are not dictated by governments. And he also ought to know that wages aren't the only factor in people's well-being - the key is income on the whole, and wages are only a constituent part of income.

Unless Ed Miliband doesn't know the facts of the British economy, it would appear he's disingenuously capitalising on the current national mood rather than on empirical evidence. According to the IFS, disposable income (which includes not just wages, of course, but interest on savings, benefits, share-profits, etc.) has been steadily rising faster than inflation. Yet whenever I debate the British economy with people, or see members of the public being interviewed on TV, the overwhelming majority believe that prices are continually growing faster than incomes. The data shows otherwise.

Miliband is using fanciful emotional propaganda to convince struggling people that Labour-driven regulation in wages and prices can ameliorate the ‘cost of living crisis’. The real truth is twofold. In the first place, Labour’s proposed intervention would have the complete opposite effect to their aims. It would slow down the recovery, not enhance it. And in the second place, if Miliband wants to have a more candid look at why the cost of living has been a strain for many, he should look not towards George Osborne but back to the financial crisis of 2008 and the concomitant Blair/Brown period in which Britain's position changed relative to what it was in global terms. The well-document sterling devaluation meant that your £1 bought less than it used to. When that happens nominal growth falls behind with inflation, which causes incomes to fall more than in other parts of the world. Now there is global connectivity in economies, with mass importation and exportation conditioning so much, a strain was inevitably placed on the UK living standards, and it was under Blair and Brown’s watch that it happened.

By all means let's encourage politicians to lock into their powers of sympathy; let's consider policy improvements - and let's be paragons of positive social change. But the crass distortions we are seeing from Labour in an attempt to obtain a majority in next year’s general election are most unwelcome.

 

 

 

What They Don't Tell You About 'Poverty' In The UK

Millions of public sector workers walked out on Thursday during a massive coordinated strike against what they are calling ‘poverty pay’. These are people with jobs and pensions complaining because they are only getting a 1% pay rise - they are not starving children in Africa. While I don't deny that times are hard for some people in the UK - using the word 'poverty' to describe their pay strikes me as being quite distasteful when you consider how relatively well off they are compared with the world's neediest, like these children in the picture below.

British public sector workers claiming to be stricken with poverty are a bit like people with migraines claiming they have brain tumours. But it is not entirely their fault - they have been given licence to make claims of poverty thanks to the ineffectual way our government defines it. This problem is exacerbated by the fact that according to a recent BBC bulletin, there are apparently "over 13 million people in the UK living in poverty", with the majority of them either working or coming from a working home.

What does it actually mean to be in poverty, and how has the government got it so wrong? To see how they have got it wrong, let's first see a definition of 'poverty' that gets it just about right. Here's a definition as an absolute measurement on a global scale: a person is in poverty if they are eating less food than is required to sustain the human body (approximately 2000–2500 calories per day). That's an efficient measure of poverty, because anybody in the world can have their well-being measured according to daily consumption of food (the same could be applied to access to clean drinking water).

Sadly, unlike the global definition I just described, the UK measurement of poverty is nothing like as efficient - it is actually pretty meaningless. Officially, the UK Child Poverty Act 2010 measures poverty as:

"Each household income that is below 60% of the median income"

Not only is it the case that, when translated into real terms, no one in this country is in absolute poverty compared with developing world poverty - it is also the case that making UK 'poverty' relative poverty based on having earnings below 60% of the median income is a meaningless statistic because you could literally double every single person's household income and still have exactly the same number of people in poverty in the UK. To tell us that poverty is on the increase in the UK we hear that:

"Studies show that in 2012, 33% of people in Britain were living below the poverty line. It has more than doubled since 1983, when the figure stood at 14%."

Alas, this tells us no such thing. All that means is that there were 14% of the population below the median line in 1983 and now there are 33%. This statistic misses the most important factor - it doesn't factor in absolute growth, and how each person's absolute situation is different to 30 years ago. In reality, there can be more people below the median in the present day, while their absolute wealth is still greater than it was in 1983. You could even reduce poverty by lowering the median, because that would bring lower earners closer to the median, even though in real terms their wages remained unchanged.

Furthermore, aside from the aforementioned absurdity that the government could double every single person's household income and still have exactly the same number of people in poverty - what's even more foolish about the median line definer is that the government could actually reduce poor people's poverty by taking some of their money as long as they took more money from those richer than them.

In evaluating their 'poverty' status the public sector workers are concentrating on their disposable income when they should be focusing on their overall consumption. If escaping poverty is about having the basic necessities in life - food, drink, housing, heating, education and health care, then household income is not an accurate measure of whether someone is in poverty. I know public sector managers who earn much more than the average public sector worker but whose disposable incomes are less than those earning an average wage. Are we to conclude that because some managers have only half as much disposable income as their co-workers that they are to be classified as being in poverty? Clearly not.

This is a good analogy for British people in general - most of the basic necessities obtained (either from earnings, government spending or government welfare) constitute consumption, not disposable income. It is easy to exaggerate the differences in the former by focusing on the differences in the latter - but this is absurd because it is the former that is the proper indicator of poverty. Until the government sorts its definition out, disgruntled workers will be only too willing to claim poverty for themselves, and these absurd incongruities will endure.

Scotland's Independence Decided By Tossing A Coin

 

 

The BBC's Question Time had a 'Scottish Independence' special last night. Everyone except the megalomaniacal Alex Salmond, his SNP buddies, and a few Scottish hopefuls knows that when the date for the Scottish independence referendum arrives Scotland will not be independent from the rest of the UK. So, nothing much to add to that. 

 

However, as the reality is so predictable, for a bit of fun let's imagine the following hypothetical situation. Suppose in the Scottish referendum 4 million of the country's 5.2 million citizens turn out to vote on the question of independence, with the result being as follows:

Yes: 2,000,001

No: 1,999,999

Because it's so desperately close, there would be lots of panic and a desperate need for a careful, time-consuming recount. The argument would be, there's a lot at stake, and if it's *that* close, the time and money expended on a recount is the rational and necessary thing to do.

The closeness of the vote says the opposite to me.  If you think about it - a time-consuming and thus costly recount might be less sensible than one first thinks. Presumably a vote that is so close means that the Scottish people, as a whole, thinks there's virtually nothing between the two outcomes, with none of the two outcomes appearing to be distinguishable in terms of quality of result. Therefore, accounting for a very generous final count margin of error of approximately 0.001% (which is around 40 votes), it might be better in this hypothetical scenario if everyone agreed to simply settle the matter with the toss of a coin. And if that coin toss could include the separation of Wales too, even better.

 



If The Government Cared About Its Citizens, It Would Allow Smoking In Pubs

Some Muslim men in this country are so imbued with patriarchy and suppression of women that they enforce the wearing of the burqa. In some countries things are a lot worse - this prohibition would be mild in comparison (for example, there are places in which if Muslim women get raped they are punished by being stoned to death). Most politicians in the UK would be disgusted at enforced wearing of the burqa. But while they may have no desire to enforce the burqa, UK politicians certainly enforce many other kinds of prohibition based on things they don’t like and think we shouldn’t like.

For example, politicians in this country slap extra taxes on things like alcohol, cigarettes and fatty foods, because they want to tell us how to look after our bodies more prudently. They enforce a minimum wage law because they want to tell us who we can employ and for how much. They tell us what they think are the right levels of emissions, and penalise us if we exceed those levels. They even tell us what we can and can’t advertise. Cigarette advertising has been banned in the UK for nearly 20 years now. Currently there are government talks to ban the branding on cigarette packets too.

What this shows us is that our politicians differ from their Muslim extremist counterparts only by degrees of what they think should be part of the state’s control over own lives and what we wish to do to our bodies. In some countries it is cigarette prohibitions, in others it is compulsory face-covering – but on the principle of trying to control what we do even when we are not harming others, they think along the same lines as their Muslim counterparts - that it is part of their mandate to do so.

If you're ever looking for a good analogy that captures the difference between libertarian wisdom and big-state impediments, then the aforementioned smoking example is a good one. The government imposes its market interference on us by banning advertising of cigarettes and smoking in public. Should they have done this? No, I don't think so. They have made the mistake of creating a policy by only looking at the negatives of smoking. They have forgotten that smoking has many positives - most notably, that a lot of people in the country like smoking. I am not one of those people - the smell of cigarettes and the pollution they bring are hugely disagreeable to me, and I personally benefit from the smoking ban because I never have to incur it in pubs or restaurants. However, despite that, I think the ban was unfortunate for freedom and liberty, and largely unnecessary, as the work of Nobel Prize laureate economist Ronald Coase shows us.

Coase came up with what we now refer to as 'Coasian bargaining' - which, in this context, would go roughly as follows. Some of the UK population wish to smoke, and some do not. Some pub landlords might like to make their pub smoke-free, and some would not. Coasian bargaining says that if left to their own devices people can decide better than governments what's best for them.

Suppose there's a village with two pubs - The King's Head (KH) and The Queen's Arms (QA).  The village consists of 100 regular pub customers - 65% don't smoke and 35% do. Efficient pub landlords would compete to cater to their needs - and in doing so would have to bear in mind the needs of the smokers and the non-smokers in the village. Perhaps the QA becomes a non-smoking pub and non-smokers flock there. This would create a stream of regular custom for the KH as their landlord chose to carry on allowing smoking in his pub. Suppose the QA became the busier pub due to its non-smoking policy. The KH landlord would need to incentivise more customers to come into his pub. But he has options on the table.

Perhaps he lowers his prices, or installs SKY TV, or has free pool night, or has a ‘curry and a pint for a fiver' offer every Thursday, or starts a darts team, or makes Friday a karaoke night. Alternatively, he could allow smoking but stay open an extra couple of hours. That way those QA customers who prefer to carry on drinking after 11pm even though they have to endure a smoky pub will come to the KH after the QA closes. In the meantime, in normal drinking hours, those who will endure the smoky atmosphere for the benefits of SKY TV, or pool, or karaoke will use the KH more regularly, and those who prefer clean air and no SKY TV, pool, or karaoke will use the QA more regularly.

What is great about this situation is that both customers and landlords are able to respond to supply and demand in a free market. If you would forsake SKT TV, pool and karaoke for cleaner air, you will stay at the QA. Equally if you have no regard for karaoke, but consider the smoke worth putting up with to play on the pool table, you might drink in the KH on pool nights, despite continuing being a regular in the QA on non-pool nights. If you hate smoke full stop, you'll probably be a regular in the QA and never go in the KA. Naturally, the QA could compete with the KA’s pool night custom by getting its own pool table, or it may simply continue to capitalise on the number of people that like smoke-free pubs.

Whatever happens, though, the market of supply and demand dictates that successful landlords must cater to the needs and wishes of their customers. What cannot possibly help the landlords is having a state-enforced smoking ban imposed upon them. Having this imposed on them means they can no longer be alert to the signals of smokers and non-smokers in a free market economy.

Not only does the government’s policy erode away people’s liberties in the free market, it actually is in danger of harming the people it seeks to protect most – namely victims of second hand smoke – and in particular, victims of second hand smoke that happen to be children. The irony is, the government's reckless no-smoking in pubs policy may just as easily have a worsening effect for children, particularly if (as has happened) many smokers have exchanged pub drinking for drinking and smoking at home. If you ban people from going out and smoking in the pub, then you encourage them to buy beer and fags at the supermarket, and invite their mates round and smoke in the house instead. Given that most living rooms are smaller than pubs, this would in many cases be worse for children, even more so for the ones who wouldn't have been in the pub in the first place.

What does this actually say about our politicians?

When the state tries to protect us and penalise buyers and sellers by interfering in mutually volitional transactions it has overstepped the mark. You may argue further that in being enlightened about the net harm that bad things cause us, the state acts with prohibitions commensurate with the harm caused. But that’s not the case either.

What causes more net harm in the UK, infidelity or having smoking brands on cigarette packets? Clearly infidelity causes much more harm to society – it engenders pain, heartbreak, fights, mistrust, divorces, family break-ups, parent-less children, and many other concomitant effects. Having smoking brands on cigarette packets causes vanishingly small societal harm in comparison, particularly if you bear in mind that people that smoke do so willingly, and that passive smoking causes only a vanishingly small number of deaths or illnesses in the UK. Yet infidelity is not illegal, whereas cigarette advertising is. Don’t get me wrong, I wouldn’t want to make infidelity illegal – I’m just pointing out that the government’s principle of meddling in people’s daily societal affairs is not as progressive as many think, and differs from those extreme Islamic prohibitions only in degrees of nuance, not in the general principle of oppression that underpins them.

 * Photo courtesy of film.com

Had to do a few EDIT TO ADD parts to the smoking blog, as there were a few faulty objections in response that needed addressing.

EDIT TO ADD:

A few subsequent comments in response to one or two responses to my smoking blog….

One chap protested by insisting that "I am entitled to my basic right to health, and people smoking in public infringes on that"

Alas, there is no basic right to health in this context - it is a fantasy. What you have is a right in life not to be harmed against your will. But that kind of right is irrelevant in the issue of smoking in pubs and restaurants. Your basic right in life not to be harmed means that if, say, a man punches you to take your wallet you have a law to protect you, and a right to see him prosecuted. But you have no such rights when it comes to smoking, except in buildings you own, and in which you have a legal right to make the rules. To say "I am entitled to my basic right to health, and people smoking in public infringes on that", is to forget that you have the free choice that enables you to go to these places or stay away. That is why I gave the two pub examples the Queen's Arms and the King's Head - under a free market mechanism you would be free to drink in smoke-free pubs and smokers would be free to smoke in smokers' pubs. By saying "I am entitled to my basic right to health, and people smoking in public infringes on that" what is actually being said is that you want every pub to be consistent with your wishes - and that's just selfish and unreasonable.

But there's another problem - bars and restaurants are not public places, which is why I made the point that we are not introduced to cigarette smoke against our will - our cigarette smoke inhalation can be avoided (children are an exception - but I'm all for laws that protect children). The smoking ban is a prohibition in private spaces not public spaces - and restaurants and bars are not public places, they are private places in which the public do business. Anyone who thinks a bar or restaurant is a public place should take their own booze in there, along with some sandwiches, a salad and a picnic blanket and see how far they get. The actual effect of the smoking ban is that it encourages smokers into *more* public spaces, or worse, back to their own living rooms where their children may have greater exposure to smoke.

Next came a comment urging me to consider the increased harm caused by passive smoking.

"Given the proved harm to the health of people exposed to second hand smoke --- the harms of second-hand smoking are well documented" Quoted research "there is a statistically significant and consistent association between lung cancer risk in spouses of smokers and exposure to second-hand tobacco smoke from the spouse who smokes. The excess risk is of the order of 20% for women and 30% for men"

Fine, I'm happy to accept the risk increase - but without the data to show what the risk is to begin with, the 20% or 30% increase tells us almost nothing. I would guess that the risks to non-smokers start at an extraordinary low number. I did a bit of checking on smoking's primary cost - lung cancer - and I found that the initial probability of a non-smoker getting lung cancer is vanishingly small - it is 0.2% for men and 0.4% for women. That averages out at 0.3% - which means that for every 1000 people, there is a likelihood that 3 of them will get lung cancer (even that won't just be down to smoking - there are all sorts of other fumes around), but let's assume smoking is entirely to blame. So, although the report says the excess risk of passive smoking is of the order of 20% for women and 30% for men (let's average it to 25%), all it means is it increases the incidences from 3 people to 3.75 people per 1000 (that's not even 1 extra person in 1000). While a 25% increase sounds a lot when quoted as the researchers did - it only skews the perception when it omits the vital data - which is the original incidences - a number that is tiny.

In response to that, my correspondent responded…

"As a matter of fact, given your numbers, 0.75 people every 1000 mean that over the entire population of the UK we're talking about 50,000 more cases of cancer. Still worth trying to prevent I reckon."

I quite agree that in net terms, 50,000 people is no insignificant number. But remember, this doesn't mean that 50,000 extra people are getting lung cancer due to passive smoking; it means that anyone who, in a free society, voluntarily subjected themselves to second hand smoke in private places increases their chances of getting lung cancer by 0.3%. In a free society, everyone who goes into a smoky place considers the benefits of going in there to outweigh the slight increased risk of lung cancer.

A comment about other comparable pollutions was mentioned, which got us into other kinds of harm….

"Air pollution is a similar thing-I'd imagine the statistical influence of PM10 on the general incidence of lung cancer is provably quite small, but does that mean that we shouldn't enforce regulations to keep it under control?"

My comment is that it all depends on how the pollution is being made manifest - but yes, there are cases whereby air pollution incurs justifiable penalties. As you may know, these are called 'negative externalities' - they are costs imposed on people against their will and their control - by which we mean costs imposed outside of the transaction. In other words, an action is a negative externality to you if it’s a harm suffered that isn’t reflected in a market transaction. Something like traffic congestion is a negative externality because every car that drives into London imposes costs on the rest of the other drivers in London. Congestion charges, therefore, are penalties against negative externalities. So is air pollution from, say, a factory. But cigarettes are not, because (save for children) we are not introduced to cigarette smoke against our will - our cigarette smoke inhalation can be avoided, and people can smoke without generating negative externalities on others.

There is then the issue, which was posited, that "If it harms members of society then it harms society itself."

The trouble with this objection is that harming members of society is not an indication of harming society in aggregate terms. It's true that society knits us together so that each of our individual behaviour affects society as a whole through interconnectedness. But our connectivity is bound up in the final balance sheet, where the aggregate measurements comprise the balance sheets of all the costs and benefits. So it's true that individuals are harmed through smoking, and there is societal connectivity there, but individuals gain too, and there is connectivity there also. Saying we are interconnected is not the same as demonstrating an aggregate gain by imposing this no-smoking loss of liberty.

Take driving as an illustration to the claim that "If it harms members of society then it harms society itself". Driving does harm members of society. It causes pollution, it costs taxpayers' money, it brings about road deaths, and quite a few non-fatal accidents. If you just count costs then driving is bad. But, of course, driving has many benefits that, on aggregate, far outweigh the costs. It gives us freedom to travel, it saves us millions of hours a year in time, it gives people jobs, it enables emergency services to get to people in need, and so on. We can't just take things that 'harm members of society' and equate that to 'harming society itself', any more than a shopkeeper can take just his costs, omit his profits, and claim to be operating at a loss.

The market mechanism is there to be tailored to the needs of all concerned. The landlord wants to attract customers, both smokers and non-smokers, and to do this he (or she) must satisfy customers.

But as well, he also needs to attract staff, so he’ll need to offer better pay to compensate. Not only will customers prefer the choice of pubs - staff will too. Some staff will prefer smoke-free and standard wages, while others will prefer smokers' pubs with higher wages to compensate.

If the government left it to the individual pubs to decide on their policies, and there was a strong non-smoker resistance to second-hand smoke, then smoke-free pubs would be free to be set up, and they would attract flocks of high-paying non-smokers, and staff would queue to work there even at lower wages, with the remaining smokers' pubs satisfying smokers and staff who preferred higher wages for increased risk.

Regulation Prescience

The big reason why bad regulation is dangerous is because regulatory protocols often have a simultaneous effect on everyone, so their impediments and faults also impinge on everyone. If 500 businesses each make different individual mistakes along the way, the whole sector is not likely to be detrimentally affected. If, however, imprudent regulations hit 500 businesses in the same way then any faults in the regulatory system impinge on the whole sector.

 

As I've explained before (see "Economic Foolishness" link below), regulatory errors are not benign - in cases like the 2008 financial crisis, they are catastrophic. Have you ever wondered how peculiar it is that so many bankers made the same mistakes in the build up to the crash? Dozens of bankers making dozens of different mistakes wouldn't have brought about the grave dangers associated with what happened - it was the imprudent regulations that facilitated the crash by generating self-similarities in mistake-patterns . Here are a couple of examples unearthed this week by investigators Jeffrey Friedman and Wladimir Kraus.

 

Regulations like the Basel accords and the US’s recourse rule directed banks to rationalise their preferences from mortgage debt to business debt. Other regulations directed banks to rationalise their preferences towards targeted agencies, which led to the retardation of competitive forces.

 

Have a look at City A.M’s report and see how closely it resembles what I was saying about the cause of the crisis in this Blog post Economic Foolishness: The Truth About Bankers' Bonuses & Government Subsidies about a year ago - most notably:

 

1) "The recourse rule – pushed through by the Fed and other regulators – was deliberately designed to steer banks’ funds into CDOs – and it worked a treat. The banks gorged on them. No fewer than 93 per cent of their holdings of mortgage-backed securities were either AAA-rated or were issued by Fannie or Freddie, as stipulated by the regulations; as far as the banks were concerned, they were merely following the new best practice. "

 

2) Because they owned so many CDOs, retail banks suffered more than any other investors – except investment banks, which packaged mortgages into CDOs and were caught out with stocks of both when the music stopped. The recourse rule only covered commercial banks; hedge funds, insurers and others were not cajoled into buying CDOs. It is clear that the US authorities were therefore not only complicit but also directly responsible for the destruction of the US banking system. Their rule also helped inflate the demand for CDOs, securitisation and even sub-prime mortgages, especially when Wall Street had run out of mainstream mortgages to bundle up.

 

3) The authors remind us that the crisis was not directly caused by mortgage defaults – rather, it was triggered by a collapse in the market price of CDOs caused by fears about the effect of declining house prices. It was this which decimated balance sheets – not mortgage defaults per se. Had the regulatory system not encouraged retail banks to hold securitised bundles of hard-to-value, opaque CDOs, and instead treated other assets more fairly, the crisis might have been avoided.

 

4) The 1988 Basel I accords favoured the use of off-balance sheet vehicles such as structured investment vehicles (SIVs), which became huge in the UK and Europe and had a similar effect on the demand for CDOs. By 2006, Basel II began to be implemented outside America; it contained similar incentives to those contained in the recourse rule. The regulatory induced pro-CDO madness had gone global. Needless to say, nobody responsible for these pernicious regulations has been sacked. Bureaucrats, it seems, always get off scot-free.

 

 

* Picture courtesy of themoderstevoice.com