It must be difficult being Willy Hutton
Will Hutton presents us with this startling statistic:
Britain is 159th in the world league table that ranks investment as a share of GDP. This is not new. Owners of British companies have long been permitted a feckless lack of responsibility. Smart countries, from the US to Germany, make sure that they insulate their companies as far as they can from the myopia and short-term greed of stock markets. Instead, the British approach to ownership exposes our companies to stock market thinking: shrivelling investment, cutting back on innovation, minimising training and hoarding cash to please their irresponsible, transactional owners.
As usualy in HuttonWorld this means we must have much more investment, a more socially democratic form of investment, more politics and bureaucracy about investment and generally we must buck up and stop being so Anglo Saxon about things. And it is true that on this list the UK is a long way down ther rankings concerning fixed investment as a percentage of GDP.
But do note the general distribution (there are exceptions of course) there. The countries at the top of the list are the places that are poor. They're still trying to build things like a basic road system, a primary education system. We've already done all of those things: thus we need to invest rather less. A second related observation is that of course the richer countries will have lower levels of fixed investment. Firstly for the obvious reason that there's a diminishing marginal return to anything at all. Secondly because the richer nations are, almost by definition, those with very much larger portions of the economy in services, not manufacturing or basic commodities and agriculture. Services famously require less such fixed investment (and correspondingly higher human capital which is not included in Hutton's number).
So we'd expect a rich nation to have lower fixed capital investment as a portion of GDP. That's something (again, with exceptions like Singapore) that we can see by eyeballing the list.
But if we restrict ourselves to those already rich nations we do see that the two most "Anglo Saxon" economies, the UK and US, do have lower portions than the more socially democratic places. Does this mean Hutton wins? No, sadly not. For the economic performance of those various rich countries doesn't vary that much, certainly not in any direct proportion to the variance of the investment as a percentage of GDP number.
The background to this is that we don't in fact care how much is invested: we care what is the return on what is invested. That is, we're interested in output, not input. And if we're getting generally the same sort of output from a lower input this is regarded as a good thing. We're more efficient in the use of our investment than those more socially democratic, politically directed and stakeholder inclusive places that Hutton thinks we should be more like. This is of course a recommendation for the more Anglo Saxon form of capitalism as against the Rhineland that Hutton has spent his life trying to force down our throats.
Which is why it must be so difficult to be Willy Hutton. To set oneself up as the arbiter of how the world should be, only to find that everytime one calls facts into consideration in support of one's basic contention, that the Man in Whitehall knows best, one finds that the facts contradict the contention. That we invest less while getting much the same result is evidence that Anglo Saxon marketism is a better system than others. For we spaff less of our money on investment as a result of having fewer politicians, bureaucrats and stakeholder interests lowering the efficiency with which that investment is deployed.
Krugman the economist and Krugman the commentator
Scott Sumner, a friend of this blog, has noted that there's something of a difference between Paul Krugman the excellent economist and essayist of the nineties and Paul Krugman the political commentator of the teens.
I suspect that Krugman wants to believe that government regulation can improve the appalling working conditions in Bengali factories. So would I. But wanting to believe something doesn’t make it true.
That's actually something of a forlorn hope. For Bangladesh has many regulations about factories and buildings: it's just that everyone ignores them or bribes their way around them. Introducing more regulation into such an environment does not improve conditions, it increases either the ignoring or the bribery. The more specific complaint is that Krugman today says this:
At this point, however, there really isn’t any competition between apparel production in poor countries and rich countries; the whole industry has moved to the third world. The relevant competition is instead among poor countries — Bangladesh versus China, in particular. And here the differences aren’t as dramatic: McKinsey (pdf) estimates Bangladeshi productivity in apparel at 77 percent of China’s level. Given this reality, can we demand that Bangladesh provide better conditions for its workers? If we do this for Bangladesh, and only for Bangladesh, it could backfire: the business could move to China or Cambodia. But if we demand higher standards for all countries — modestly higher standards, so that we’re not talking about driving the business back to advanced countries — we can achieve an improvement in workers’ lives (and fewer horrible workers’ deaths), without undermining the export industries these countries so desperately need.
As above, everywhere already has regulations: it's whether anyone takes any notice of them or not that is the issue. But beyond that, there's that very odd reference to productivity. For old Krugman wrote this very perceptive essay:
- Wages are determined in a national labor market: The basic Ricardian model envisages a single factor, labor, which can move freely between industries. When one tries to talk about trade with laymen, however, one at least sometimes realizes that they do not think about things that way at all. They think about steelworkers, textile workers, and so on; there is no such thing as a national labor market. It does not occur to them that the wages earned in one industry are largely determined by the wages similar workers are earning in other industries. This has several consequences. First, unless it is carefully explained, the standard demonstration of the gains from trade in a Ricardian model -- workers can earn more by moving into the industries in which you have a comparative advantage -- simply fails to register with lay intellectuals. Their picture is of aircraft workers gaining and textile workers losing, and the idea that it is useful even for the sake of argument to imagine that workers can move from one industry to the other is foreign to them. Second, the link between productivity and wages is thoroughly misunderstood. Non-economists typically think that wages should reflect productivity at the level of the individual company. So if Xerox manages to increase its productivity 20 percent, it should raise the wages it pays by the same amount; if overall manufacturing productivity has risen 30 percent, the real wages of manufacturing workers should have risen 30 percent, even if service productivity has been stagnant; if this doesn't happen, it is a sign that something has gone wrong. In other words, my criticism of Michael Lind would baffle many non-economists. Associated with this problem is the misunderstanding of what international trade should do to wage rates. It is a fact that some Bangladeshi apparel factories manage to achieve labor productivity close to half those of comparable installations in the United States, although overall Bangladeshi manufacturing productivity is probably only about 5 percent of the US level. Non-economists find it extremely disturbing and puzzling that wages in those productive factories are only 10 percent of US standards.
New Krugman is implicitly equating working conditions with wages: for obviously, the cash is coming out of the same pot whichever it is spent upon. In a static analysis more spent on conditions will mean less for wages and vice versa. But he then goes on to say that we can adjust those working conditions without any blowback because productivity rates are close enough to be similar..
Old Krugman saw through that assertion: wages and working conditions are not set by the productivity in whichever sector it is. They're set by the productivity levels of the entire economy of the nation. That's why Bangladeshi wages are low, why working conditions are crap. Not because of anything about the apparel industry at all and certainly not because of any measurement of the productivity inside it. They're, respectively, low and bad because the rest of the Bangladeshi economy is a basket case.
It's worth recalling that Krugman was and is an excellent economist, that Nobel was truly deserved. Read and enjoy his early essays by all means. The stuff that turns up in the New York Times not so much.
Would you prefer your subsidy to a public good as a tax break or a grant?
Let us, for the sake of the argument, agree that tertiary education is a public good. I'm not so sure myself, it being both rivalrous and excludable but let's just accept that it is. Now, having determined that it is a public good then there's a reasonable argument that there should be government subsidy to it. For we're pretty sure that markets unadorned don't produce quite the quantity of public goods that might be desirable. If you prefer, public goods are, like negative externalities, one of those times when we might righteously consider intervention in the pure and unadulterated free market.
Given all of that would we prefer our government subsidy to be in the form of tax breaks, taxes not paid, by those undertaking the activity or would we prefer that it be a system of grants to those who do? I ask because Felix Salmon over at Reuters thinks that the grants are, by definition, a better manner of subsidy:
If state and federal governments are going to spend billions of dollars subsidizing tertiary education — and they should — then they should spend those billions wisely, with a focus on education. Instead, they spend those billions through the tax code, with no kind of oversight at all, pushing their thumb on the scales so as to encourage, at the margin, the purchase of buildings and the building-up of large endowments.
At which point I entirely disagree: I think that tax breaks are much the better subsidy delivery scheme.
This is really a difference of world views. If you believe that politicians, those who direct such subsidies, are knowledgeable, clever and honest beings, striving only to do what is right for the common weal, then you might well argue that they should direct, in detail, where the taxpayers' money goes. If you're over the age of seventeen you will have been disabused of that notion, that politicians are honest, knowledgeable and clever, and so would prefer that politicians do not direct in detail. Rather, we might accept that public goods exist, that they should be subsidised in some manner, but having done that we want to keep the politicians as far away as possible from the details of what happens next.
I would go further too. A tax break means that anyone who meets the rules gets the tax break. A grant making system means only those who suck up to the politicians get the grants. And let's face it, we really don't want our impressionable youth educated by those who can stand interacting with politicians now, do we?
All of which leaves me with only one problem. I know very well that Felix is over 17 so how come he still thinks of politicians as they are not?
Great moments in economic punditry
This is an interesting assertion by the American writer Matt Yglesias:
The big issue that gets left out in pious lectures about comparative advantage is that Smith and Ricardo didn't believe that long-term economic growth was possible! This was the era of economics as the "dismal science", meaning that political economy was essentially the study of how to optimally allocate a fixed pool of resources.
Well, no, the dismal part of the dismal science came a little after Smith and Ricardo. The coinage is actually from Thomas Carlyle in 1849 (long after the deaths of both Smith and Ricardo) and was referring to the awkward fact, awkward for Carlyle, that economics indicated that reintroducing slavery might be a not very good idea. A very bad one in fact and given that Carlyle was advocating its reintroduction in the West Indies a finding that he was a tad angry about and thus the naming.
But over and above that it's quite remarkable to think that the man who has bored us all senseless for two centuries with that reading about the pin factory thought that long-term economic growth was impossible. For that passage, in exhaustive detail, is laying out the foundation of what we now call Smithian growth (or at least Deepak Lal calls it that). The division and specialisation of labour makes that labour more efficient in production. This is exactly how this form of long term economic growth actually happens: more division, more specialisation and trade in the resultant production in fact. Further, to think that Ricardo thought such growth was impossible is most odd. For in laying out comparative advantage he showed how it was true that even if you were worse at doing everything than everybody else then you'd still gain from the economic growth that would come from that division and specialisation: if you and everyone else concentrated on their comparative advantages.
This is more than just a minor snark: Yglesias is edging towards the idea that mercantilism might not be such a terrible idea. Yet it is a terrible one: precisely and exactly because it puts artifical barriers in the way of that division and specialisation of labour across national boundaries. Something that limits that Smithian growth: as Adam Smith was pointing out when he gave us the theoretical basis as to why there can indeed be long term economic growth.
I really don't believe in macroeconomics you know
I've long been making the point that in the long run it's all microeconomics. How the world will look, the wealth of the people, the consumption opportunities, the technologies used, by our grandchildren will have almost nothing at all to do with whatever macroeconomics is practised right now. They will all, however, be hugely dependent upon the microeconomics we practise now. The incentives in the economy to innovate primarily. If we look at the economy over a couple of centuries, for example from Adam Smith's day to our own, seemingly vast macroeconomic events like the Great Depression are little squiggles away from the long term fundamentals.
However, I also am not sure that I believe in much of macroeconomics simply because we so often find people cooking the books. As seems to be happening in Italy:
Beppe Grillo, leader of the opposition 5-Star Movement, has long hammered on this point. In April, during the post-election interregnum, he’d clamored for “the immediate payment of about €120 billion” that the government and public entities owed the private sector. The government’s refusal to pay its suppliers violates EU rules. But the EU has soft-pedaled the issue, for two very big reasons: payment of arrears would force Italy to sell a truckload of bonds when there might not be any demand; and it would push the deficit way beyond the 3% line in the sand. Thanks to cash accounting, only actual disbursements make it into the deficit figure. Italy has achieved its “austerity” goals by not paying its suppliers. Once again, abracadabra.
Isn't that simply ridiculous? The targets set are because there's a thought that excessive debt (and 130% of GDP can be thought of as that) can lead to a debt spiral: ever more must be borrowed to pay off the old borrowings. This borrowing, above certain limits, must be discouraged, even an insistence on bringing the outstanding stock down.
But having done this everyone then carries on and allows said debtor to continue to borrow. €120 billion is a substantial sum, even when talking about government money, and is somewhere in the 5-10% range of Italy's GDP. That they're running it up in unpaid bills rather than Treasuries makes it no less a set of debts that the Italian taxpayer is going to have to cough up for sooner or later.
Either more debt is a very bad idea and thus all this austerity is a good one, in which case the Italian state cannot be allowed to stiff its creditors. That's just running up the same debt by other means. Or, alternatively, more debt doesn't matter so issue the Treasuries and stop stiffing the trade creditors. But you can only have what the EU is allowing to happen, debt's a very serious matter but keep on running it up all the same if one is being entirely inconsistent.
Which is, as I say, why I'm not sure that I believe very much macroeconomics. They seem to be making it all up as they go along far too much of the time.
Recognising that you've really turned into an economics geek: when you interview the kebab shop owner about the merits of clustering
I'm afraid that I must now confess to really having turned into an economics geek. From someone just interested to someone committed. I found myself interviewing the local kebab shop owner on the merits of clustering last week. I think that counts as falling over the edge, don't you?
There's two ways about thinking through the problem of where to site a retail store. One is, obviously, to site yourself where no one else is. You can then enjoy higher prices and margins as there's no competition. Sometimes people go to extremes, like truck money, where the workers are paid in money that can only be used at the company stores. Other times it's the village shop which can, possibly just, make a living by providing the conveniences that it's not worth going to the supermarket for.
Then there's an entirely opposite view: set up in business where everyone around you is doing much the same thing. Bond Street for expensive clothes, Hatton Garden for expensive presents for mistresses, just around the corner in a street whose name I have forgotten for arty and antique pieces. Sure, you're competing against the other people selling to the same clientele. But you're also all where that clientele can find you. The rich man will know where to go and wander about to find that necklace, picture or garter belt for his temporary inamorata. Or, perhaps more realistically, the younger and prettier half of any relationship will know where to spend the money of the other part of it. This is known as "clustering".
When I first moved to Lisbon I asked a friend where I should go to buy furniture: "this street" was the answer. I was a bit confused but that's how Lisbon retail (before the invasion of retail parks and centres) was laid out. Silver on this street, fish on that, furniture on the other. You browsed the shops knowing that all of the interesting places selling what you were looking for were in this area. Which brings me to kebab shops in Usti nad Labem (in the Czech Republic) where I am working now. Just around the corner from where I write is a kebab house. Been going some time, does a roaring trade (the bus stops that lead from the downtown bars to Studentville are just outside) and then a canny entrepreneur opened a new kebab store right next door. One friend here denounced that as cheating: stealing the business created by the first house.
So I asked Shadab (yes, there are hard working Indian entrepreneurs from Bombay doing this in CR just as there are in the UK), the owner of the original shop what had been the effect on his trade. Increased it, definitely. Competition does indeed mean that he gets less money out of any given amount of foot traffic: but competition can also increase foot traffic so that total revenues can rise for both suppliers. When I shouted "clustering!" he knew I was mad: and I of course knew that I had indeed descended into being a proper geek about economics.
Then again, I should have known this already. There's a reason why all the financial types are in The City. There's a value to knowing where all of the different ways of losing money are located, no?
Chart of the week: Portuguese bond yields jump as government falls into disarray
Summary: Spike on Portuguese bond yields show euro crisis not over
What the chart shows: The chart shows the yield on the Portuguese 10-year benchmark government bond; and the difference (‘spread’) between the yield on its German equivalent
Why is the chart important: With the (admittedly significant) exception of the Cypriot crisis earlier this year, the euro area has been relatively calm since ECB President Mario Draghi last summer promised to do ‘whatever it takes’ to save the euro. However, in the first week of July, there was a brief eruption in Portugal, where the Finance Minister resigned due to the country’s failure to reach its fiscal targets; and the Foreign Minister then resigned because he disagreed with the Prime Minister appointing a new Finance Minister who vowed to continue austerity instead of pushing for growth. But Portugal was the ‘troika’s’ star pupil – doing everything asked of it without complaining. Failure to achieve targets raises a question mark over the entire austerity policy pursued in the euro area; and the rise of politicians in a ‘model country’ questioning it means that the days of austerity – already eroded – are likely to be numbered.
Making it easier to fire workers really does lower the unemployment rate
We're all used to the idea that making the labour market more flexible, which is a code for making it easier to fire workers, lowers the unemployment rate. I think we've all also seen the counter-argument that this is tosh. It's never quite laid out why it is but it must be so there. Fortunately we've now got some more empirical evidence to bolster our case about flexibility increasing employment:
Using 1981–2009 data for the 50 states, this article examines the relationship between economic freedom and the unemployment rate, the labor force participation rate, and the employment-population ratio. After controlling for a variety of state-level characteristics, the results from most specifications indicate that economic freedom is associated with lower unemployment and with higher labor force participation and employment-population ratios.
The advantage of American data is that the various states are rather closer together in their overall culture than are the (fewer) countries of Europe. It's thus easier to see the effects of variations in economic freedom without having too much confounding data. But there we have it, greater economy freedom, including those hiring and firing laws, leads to lower unemployment. We should thus be deconstructing some of our own wasteful regulations and laws around this point in order to lower our own unemployment rate.
I'd also make a rather more speculative point. Why is it that people don't want to believe this finding? As above, we've known it for a long time but there's a great reluctance to believe it. And I think it's because people really don't understand the job churn in the economy.
If you think that a rise in unemployment of 100,000 means that 100,000 people have been fired then you might well think that making it harder to fire people will lead to a reduction in the number of people in unemployment. But the truth is that this isn't what causes a rise in unemployment at all. There are always 100,000 people getting fired. More than that actually: some 3 million jobs, or 10% of the total, are destroyed in the UK economy each year. That's that destruction part of capitalism. This rate doesn't, particularly, rise in recessions nor fall in booms either. That's a reasonably constant rate at which the economy destroys the things that people do for a living.
What does change in a recession is how many new jobs are being created: thus the balance, between those fired and those hired, changes. The actual unemployment numbers that we see are the end result of this complex process. If unemployment rises by 100,000 in one month it's not the result of 100,000 more people being fired. It's the result of 100,000 of that (roughly) 250,000 who get fired every month not finding a new job. Unemployment isn't best thought of as a result of people being fired therefore: it's a result of people not getting hired.
At which point the economic freedom argument begins to make intuitive sense. The more economic freedom, the less regulation stopping you from doing things, the more things will get tried and done.The less the cost of firing an undesired worker the more of them will be hired: demand curves do indeed work that way. So far so true: my speculation is that those who don't get this point are those who don't really understand why unemployment occurs. It simply isn't because people get fired because people get fired all the time. It's that they don't get rehired at times which is what causes unemployment.
Milton Friedman's objection to immigration
Free market supporters of immigration controls often quote Milton Friedman in support of their position:
There is no doubt that free and open immigration is the right policy in a libertarian state, but in a welfare state it is a different story: the supply of immigrants will become infinite.
On the face of it, this is a powerful argument for restriction. As I’ve noted in the past, whether we like it or not people are dependent on state institutions like the NHS and it would be a bad thing for those things to crumble without the reforms that make market-based alternatives viable.
But are things as clear as they seem? Elsewhere, Friedman also said:
Look, for example, at the obvious, immediate, practical example of illegal Mexican immigration. Now, that Mexican immigration, over the border, is a good thing. It’s a good thing for the illegal immigrants. It’s a good thing for the United States. It’s a good thing for the citizens of the country. But, it’s only good so long as it’s illegal.
I think Friedman vastly overstates his case in his final line (it’s only good if it’s illegal?), and empirically he seems to be mistaken (the fiscal contribution of immigrants is usually positive in general, and has been positive in the UK in particular) but still, let’s take his point as given. Does that make immigration controls the best option?
No. There are ‘keyhole solutions’ we can implement instead – that is, solutions that are specifically designed to address the supposed problems that go with open borders.
We could require that immigrants post bonds priced according to the average cost to the state of someone of their age. We could require immigrants to provide for their own health insurance, unemployment insurance, education, etc. We could restrict the use of the NHS and other state services to immigrants who are working. And so on. The point is that most of the problems associated with immigration are not best solved by restrictions on immigration. Don't use a sledgehammer to crack a nut.
Well, OK, but we are where we are. Those solutions are nice in a think tank fantasy-land, but they’re never going to happen, you might say. (Well, not with that attitude, they're not!) For the sake of argument, what if these keyhole solutions were irrelevant and Friedman was empirically correct?
In that case, his point about illegal immigration being the best kind of immigration – and indeed, a net positive overall – might really be worth thinking about. As Will Wilkinson has argued, people who follow Friedman on immigration should then argue not for restrictive immigration controls, but restrictive immigration laws paired with a toothless Border Agency, or one simply told in practice to ignore these laws. (Much as most decent police officers ignored anti-sodomy laws for some time before those laws were repealed.)
So maybe that’s a Friedmanite ‘keyhole solution’ for people concerned about immigrants sucking the welfare state dry: keep immigration laws the way they are, but shut down the UK Border Agency and treat the laws as the silly anachronisms they are.