An excellent point about free trade

From Don Boudreaux's quotation of the day series:

After 1860 only a few import duties remained, and those were exclusively for revenue on such non-British commodities as brandy, wine, tobacco, coffee, tea, and pepper. In fact, although most tariffs were eliminated altogether and the rates of duty on all others were reduced, the increase in total trade was such that customs revenue in 1860 was actually greater than that of 1842.

Another spotting of the Laffer Curve in the wild there of course.

But it's worth noting that tariff changes weren't the only thing going on at this time. There was also a quite radical change in shipping technology: we were at the beginning of the steam age here. As another example, after the US Civil War there tariffs pretty much doubled: but the prices of imported goods fell. For we need to remind ourselves that the full cost of trade protection is the artificial barriers of the tariffs, the non-tariff barriers from bureaucracy (famously, Mitterand only allowed VCR imports through one French port with only three customs inspectors) and the transport costs. For the US the fall in late Victorian shipping costs was greater than that rise in tarrifs.

And we can also use this to explain a part of our modern world. Yes, it's great that tariffs have come down in this post-war period. But this is also the time of the shipping container: 30 tonnes of pretty much anything can be moved pretty much anywhere for under $5,000 these days. International trade would have increased massively even if tariffs had stayed at their old rate.

And this leads us to a point that those who promote infant industry protection need to face: the tariff levels you would need to be able to successfully protect local industry would be so high as to probably not be politically possible.

Chart of the week: US broad money still reliant on QE

Summary: Tepid US broad money growth still dependent on QE

What the chart shows: The chart shows the annual percentage change in US broad money and in credit to the non-bank private sector. Broad money is the recreation by Stein Brothers of the M3 measure discontinued by the Federal Reserve in March 2006.

Why the chart is important: US broad money growth continues to oscillate around 5%. This is better than the 4% M4 growth seen in the UK and considerably better than the 1.4% recently registered for October in the euro area. Nevertheless, US bank balance sheets – and hence broad money growth – still seem dependent on continued quantitative easing. Since the Fed’s ‘taper terror’ subsided in September, broad money has grown by $135bn, compared with the $160bn the fed has spent on buying assets from the banking system over the same period. Total bank credit has grown by $36bn and loans and leases by $19bn (the difference between total bank credit and loans and leases in bank credit is lending to the public sector). By contrast, cash assets have grown by $191bn. What this all means is that US banks are still stocking up on cash and that credit growth remains weak. The economy seems strong enough to support the beginning of a QE taper; but the development of bank balance sheets over the first two or three months after a taper begins, will be a key pointer as to when it will actually end.

So that's the gender pay gap solved then

We've the release of this year's figures about the gender pay gap and it seems that we'rte pretty much done, we've solved it. The full figures are here. As I've been saying for a number of years now there most certainly used to be gender discrimination in pay. What we want to know now though is whether there still is? And as that chart shows, no, it's very difficult indeed to see that there is. For in the 18 to 40 group pay is indeed roughly equal. It's only in the older ages groups, those who coupld well have suffered from the earlier discrimination, that we are still seeing significant differences in pay.

So, we can declare victory and go home then. Except, of course, there are those who willfully misuse the statistics to insist that more must be done. As in The Guardian:

More than 40 years since legislation was introduced which outlawed paying men and women different wages for the same work, women still face a lifetime of earning less. New figures from the Office of National Statistics show the pay gap is beginning to widen, after years of slow but steady progress. Looking at mean average earnings

And they should be slapped with a wet haddock for that. Because they have been told, repeatedly, that you should use the median average when discussing these figures. The mean is too distorted with the incomes of the 1%, and the 0.1%. What encourages me is that the comments section is full of people pointing out the faults with the assertions being made.

And as to exactly what it is that we did to get rid of that gender pay gap? At root I think it's simply the way work has changed. The more muscular male physique no longer matters in anything but a tiny minority of jobs. Thus there's no particular reason for men and women to be paid different amounts therefore they're not.

Raise wages, perhaps, or possibly lower benefits

We have one of the usual arguments here about immigration. An employer, in this case Dominos, says that they could hire 1,000 people immediately if only people could be bothered to to do the work they are offering. The response was that perhaps they should try paying a little more in order to encrouage people to apply:

The immigration minister, Mark Harper, has hit back at employers who say they have to recruit foreign workers from outside Europe to fill low-paid jobs by telling them they should offer better wages. Harper said that Lance Batchelor, the chief executive of Domino's Pizza, should reflect on the salaries he was offering if he could not fill 1,000 vacancies without recruiting unskilled staff from outside Europe. The immigration minister told the Commons home affairs select committee: "He should probably pay his staff a little more and he might find them easier to recruit. It's a market."

That's a fine answer as far as it goes: but it's not really a complete analysis of the situation. For what it's leaving out is the rigging of that market by government itself. We're all aware that we have a serious problem with the tax and benefit withdrawal rates on the low paid in this country. There are millions who face marginal rates above 60% and even tens of thousands facing them of over 100%. And it is indeed the change in disposable income which is the incentive to work or not, not the wages that you are nominally being paid.

OK, now think of this same problem from the other side. Say Dominos is paying £7 an hour (I've no idea what the correct number is) and they cannot get the labour at this price. Sure, perhaps they should offer more to get what they want. But precisely because of the high tax and benefit rate they have to offer much more to change behaviour. If they offer another £1 an hour then only 40 p to nothing of that gets through to the disposable income of the worker they're trying to incentivise. So part of their problem is indeed that the government taxes the working poor too highly. A rise in hte personal allowance would help here.

But there's one more thing. Recent immigrants are not given access to hte full panoply of the welfare state and its subsidies. Therefore, as they work they face lower benefit withdrawal rates and thus greater changes in their disposable income from taking work or not. We've thus a rather perverse set of incentives built into how we do things. Recent immigrants are always going to be more likely to take low paid work than indigenes are, simply because we've structured the welfare system to create the incentives this way.

Taxes were too low in the UK this year by precisely £604.48

The Guardian, not that it has quite realised it, has proven that in the very worst case taxes were too low in hte UK by £604.48 this year. Here is the proof:

Members of the public have donated almost £900,000 to the government so far this financial year to help pay off the national debt or boost public spending, figures from the Treasury show. Clearly the 11 contributions, ranging from 78p to £520,000 and totalling £898,539.80, are a drop in the ocean of Britain's £1.2 trillion national debt, which chancellor George Osborne announced last week was set to be £18bn lower than forecast in March. But it is the highest amount since £1.08m was given in 2010. The figures, supplied under a freedom of information request, showed that most of the money donated since April – more than £897,000 – was in the form of bequests. Gifts and unclassified payments add up to £604.48.

This is, of course, rather different from what most people actually say about taxes. But then we do know that there is this thing called revealed preferences. Do not look at what people say as a guide to their true views but at what they do. And if you think that taxes are too low then you will indeed send in some extra cash to the Treasury. And some people did as above to the tune of that six hundred quid. We can ignore the bequests as those aren't actually bourne by the people doing the bequeathing. The incidence of those gifts is clearly upon those who did not inherit it instead...and as we know it's rather easier to call for other people to pay more in tax than it is to be willing to cough up yourself.

I've made this point in several different places over the years but it has only just occured to me that I've been missing a trick. For we do have estimates of how much tax people ought to be paying but aren't through a varietey of means. Let's take the egregious Richard Murphy's £120 billion estimate of not paid tax as a result of tax avoidance and tax evasion. We can even pretend that this figure is correct if you like. Now we can apply revealed preference to this. That number might be what politicians say people should pay but by the revealed actions of the populace in dodging it it isn't what the populace thinks the tax take should be. That is, if we look at additional taxes voluntarily offered then taxes are too low by a few hundreds. And applying exactly the same logic we can also say that taxes are too high by £120 billion. And that latter sounds more likely to me too.

Chart of the week: US home equity withdrawal picks up

Summary: US mortgage equity withdrawal has picked up – but the scope for more isn’t there

What the chart shows: The chart shows mortgage equity withdrawal as a share of the change in personal disposable income

Why the chart is important: In 1957, US households’ equity in their houses was three times the value of their mortgages. As recently as 1989, it was twice as much. By Q1 2009, the value of the mortgages was close to twice the equity. Since then, by dint of furious deleveraging, US households have restored parity between mortgages and homeowners’ equity. In recent quarters, they have taken to withdrawing some equity from housing in order to underpin spending. But, the scope to do so on a pre-crisis scale – when mortgage equity withdrawal could reach up to 10% of the change in disposable income – is no longer there. This means that US consumption will depend on the actual change in household incomes, with some input form a pure wealth effect. Given the current weakness of US income growth, this means that the American recovery, while continuing, will remain sluggish.

How do politicians manage to believe such things?

I'm slightly boggled by this statement:

Tim Farron, South Lakes MP and chair of the all-party parliamentary hill farming group, said: "We need to do all we can to support our farming industry, particularly in the uplands where life can be a real struggle. This support and funding could make a massive difference to upland farmers throughout Cumbria and help show the next generation that there is a real future in a career in farming."

It appears to me to be an example of cognitive dissonance. For we're also being told this about that same occupation:

An upland farmer earns, on average, only £6,000 a year, which has led to a number of people leaving the industry.

That you can only earn £6,000 a year as an upland farmer is proof perfect that there is not a real future in a career in this type of farming. It is true that not everyone is paid their marginal product but for self-employed people like these hill farmers it is indeed so. Their earnings are exactly the measure of the value that their labours are adding. And given that we're in a country where the GDP per capita is some £25,000  (recall, this includes all of those who do not contribute to the money economy at all) they are producing remarkably little value as compared to the rest of us.

This is telling us that hill farming is something we should stop doing therefore, not something we should be devising ways to prop up. We would all be richer if these farmers simply stopped and went off to do something else.

Introducing you to the word emporiophobia

Via Don Boudreaux we get this wonderful economics paper, Emporiophobia:

There is widespread emporiophobia (fear of markets) and this has important policy implications as it leads voters to demand anti-market policies. There are many reasons for this anti-market attitude. However, economists could reduce emporiophobia if we stressed cooperation rather than competition in our writings and policy discussions. In a sample of introductory textbooks, competition is mentioned on average 8 times as often as cooperation. The fundamental economic unit is the transaction and transactions are cooperative. The benefit of a market economy, increased consumer surplus, comes from cooperation through transactions, not from competition. Competition in a market economy is competition for the right to cooperate. Competition is important because it guarantees that the best cooperators will win and because it establishes the efficient terms for cooperation, but cooperation is fundamental. For most people, competition has negative connotations as it focuses on losers, while cooperation implies a win-win situation. As an example, if we say “Wal-Mart outcompeted its rivals” we think of losing firms being bankrupted. If we say “Wal-Mart did a better job of cooperating with its customers” we think of the benefits created by Wal-Mart. Economists in our policy and textbook writing should strive to use the second sort of locution, not the first. Other implications involve the morality of the market, “giving back,” and characteristics of market failures.

This is of course a political, propagandistic even, argument. But a correct and strong one for all that. Even more so over here in the UK of course. You see the misunderstanding slathered all over the arguments about markets in the NHS. Polly and all bewailing the way in which competition is going to reduce cooperation. And it doesn't matter how many times you tell them, they just cannot and do not get the point that a market transaction is a form of cooperation.

And a further little observation about the UK and this emporiophobia. I wouldn't want to have to prove this but I am still certain that I'm right. One of the reasons the country is not reliably more free market is exactly that the upper middle classes rather model their attitudes upon those of the aristocracy of old, rather than the more ruggedly bourgeois virtues of some other countries (the US comes to mind here). And of course those old aristocratic attitudes were that there was something extremely demeaning about mere trade. One did not do it, one did not associate with those who did and one most certainly did not admire it. But trade too is simply a transaction in which people are cooperating. But I do think that this is one of the reasons why markets are (by Polly and her ilk for example) still regarded as not quite a polite manner of solving a problem, even if efficient.

In what crazed universe are used cars more valuable than new?

No, I don't mean where is an 80 year old Jaguar worth more than a new Lada, rather, how badly do you have to have screwed up an economy so that the average, normal, used car is more valuable than one on the lot, never been used?

However much it is Venezuela has managed that rare achievement:

The premise may leave car enthusiasts in other parts of the world scratching their heads, but vehicles actually gain in value in Venezuela – as soon as they're driven off the new or used lot. Shortages and government-mandated currency controls have led to higher preowned car prices, as many consumers are desperate to find a vehicle.

I had thought that Chavismo was just the usual Latin American buffoonery of the Caudillo doing a bit of badly misunderstood socialism. But this sort of result makes me think that the place is far more badly run than that. So, my apologies for not paying enough attention I suppose. And this isn't something new either: I can see references to this going back to 2009 at least.

But in a move to protect consumers, Venezuela's National Assembly has sought to throw the brakes on soaring car costs. Last month, a bill was passed that, if signed into a law by President Nicolás Maduro, would attempt to regulate both new and used car prices, levying hefty fines and even jail time on venders who don't comply with government-approved prices.

That's really not going to help now, is it?

I am left just to boggle at the idea that cars rise in price as they drive off the dealer's lot. The only other time I've seen this was in the Soviet Union where you knew that if a car had been running for a couple of months then it was likely better built than the ones still on the lot.

The minimum wage's ugly allies

Ron Unz, an American conservative, has launched a new campaign to raise the US federal minimum wage to $12/hour, up from $7.25/hour. Today he makes his case on the New York Times website:

A $12 minimum wage would increase the incomes of America’s lower-wage work force by a total of over $150 billion each year, shifting those huge sums from the pockets of the sort of people who don’t shop at Walmart to those who do. A minimum wage of $12 per hour would be very good for Walmart’s business.

Usually, advocates of minimum wage increases either deny that minimum wages cause unemployment, or say that the unemployment effect would be very minor.

Unz is different. A fierce opponent of Hispanic immigration, he realises that minimum wages cost unskilled workers their jobs and that (Hispanic) immigrants are mostly unskilled. As Bryan Caplan says, “For Unz, the disemployment effect of a high minimum wage is a feature, not a bug.”

This brought to mind Walter Williams’s work on the origins of South Africa’s minimum wage. White labour unions supported the minimum wage’s introduction for similar reasons to Unz: to exclude unskilled black workers from the workforce and stop them from undercutting white workers.

Williams quotes G. V. Doxey’s The Industrial Colour Bar in South Africa as saying that white unionists “argued that in absence of statutory minimum wages, employers found it profitable to supplant highly trained (and usually highly paid) Europeans by less efficient but cheaper non-whites”, and the South African Economic and Wage Commission of 1925:

While definite exclusion of the Natives from the more remunerative fields of employment by law has not been urged upon us, the same result would follow a certain use of the powers of the Wage Board under the Wage Act of 1925, or of other wage-fixing legislation. The method would be to fix a minimum rate for an occupation or craft so high that no Native would be likely to be employed.

Williams also quotes a South African government minister’s complaint in the 1930s that white workers were losing jobs to Indians due to “unfair competition”, and his recommendation that they be legally prevented from undercutting white workers.

The economics seems to support this view of minimum wages. Neumark and Wascher’s seminal 2006 review of economic studies of the impact of minimum wages found that “the studies that focus on the least-skilled groups provide relatively overwhelming evidence of stronger disemployment effects for these groups”.

Obviously, most supporters of the minimum wage do not share these intentions. But no matter how well-intentioned they are, quite a lot of economic evidence seems to suggest that Unz and the South Africans are correct: the minimum wage can hurt immigrants and other vulnerable groups enormously. People concerned with the living standards of the poor may find that direct income redistribution is a safer and more effective way to help than minimum wage laws.