It is the strange task of economics
The usual second part of that phrase is that economics shows us what we don't know. But in this case it is in fact to tell us what we do know:
An infant school has launched a new crackdown on parents who pick up their children late from school - by fining them £6 if they turn up more than 15 minutes late. Germander Park School in Milton Keynes wants to discourage parents from treating it as a 'childcare provider' by charging whenever it has to look after pupils outside school hours.
Ah, no, that won't work. On the basis that humans are contrary beings:
In an example made famous by Freakonomics, when parents at an Israeli kindergarten were fined a small amount for showing up late to collect their children, their punctuality actually declined.
Because if we're paying for baby sitting anyway then why not take advantage of the babysitting?
Or, an alternative explanation was that the social pressures of not imposing upon the staff were stronger than the monetary fine. Once the fine was introduced those social pressures lost much of their force.
However you want to explain the finding is one thing: that the result is there is another. Charging parents for being late is likely to make more parents late: and also to make those parents who are late later. For once you've incurred the fine why hurry?
Then again perhaps we shouldn't be all that surprised by this. No one has ever found evidence that the British school system is over burdened with those who understand economics.
We free marketeers have a problem here
This is something of a facepalm moment:
When he vented his frustration about holiday prices shooting up during the school half-term break, Paul Cookson struck a chord with other parents. His rant to 250 Facebook friends quickly went viral as outraged parents shared his post about rip-off prices 143,000 times. Now the issue may even be debated in Parliament after more than 100,000 signed an online petition calling for the Government to curb prices.
Err, yes, access to the fixed supply of something may well be more expensive when more people want to gain access. It's that supply and demand thing in action. There are alternatives of course: it could be that the favoured children of party apparatchiki gain access. There have certainly been times and places where that was the allocation method. There could be queueing, there have been times and places where that has been used too. But of all the different methods that have been tried rationaing of something like this by price has ended up being the best one.
That isn't to say that rationing by price is always the best method: I'd not be happy with justice being so allocated for one. But the chance to sit in the chlorinated water someone else's baby has just passed through? Sure, ration by price.
But as we can see there appear to be at least 100,000 of our fellow citizens who don't agree. I am reminded of Bertoldt Brecht's point about the first East German elections: perhaps we should try to elect another people who do get this market economy idea.
It also reminds me of something I saw the first year after food price rationing ended in Russia. Eggs are painted for Easter, there as here, and one old grandmother couldn't understand why they became more expensive just before Easter. "Why are they more expensive just when everyone wants them?" If you don't get the basic answer to that one then the operations of a market economy are always going to mystify you. She had an excuse: she'd lived her entire life under a system that was not a market economy. Quite what the excuse of those 100,00 Brits is I'm not sure. They'd all understand instincitively why pay goes up on Christmas Day. Because that's the day that absolutely everyone wants to have off. That they can't make the leap to why holidays might be more expensive in holiday time mystifies me.
Yes, really, Women's Lib caused inequality
Now here's a thing: the liberation of half the country from their economic and social shackles I regard as an unalloyed good thing. That this liberation of women largely came from technological causes, the "washing machine" or domestic household technology as Ha Joon Chang calls it, plus the decline in the economic importance of male musculature, doesn't matter at all. That it happened was great.
However, as recent research is showing, it has also led to an increase in the inequality of household incomes.
The argument is very simple indeed. We have moved from a society in which women tended not to work into one in which they tend to do so. And obviously, women tend to do the sort of work they are educated to achieve. Add in that people tend to meet their partners through university or work these days and it's quite clear that professionals will tend to marry professionals, blue collar blue collar and so on. We thus end up with a world in which there is a strata of society enjoying two professional incomes per household and others enjoying two white collar incomes, two two blue collar and so on. Although it does rather break down at that last: stay at home housewives are more likely to be in the working classes.
Whatever the earlier level of household income inequality we had before it's obviously going to be larger now. That a polemicist for the trade union movement is married to a GP, or that the Harman/Dromey household enjoys two, not just the one, MP salaries and allowances, makes the gap between those professional classes and the average working joe greater.
Short of the State telling people who they may shack up with there's no real way out of this either.
But what's really interesting is that that linked paper is claiming that all of the rise in US household income inequality can be put down to this one factor. And if that's so then I cannot for the life of me see that that rise in inequality is a problem. People are now much freer in their love and working lives than they used to be. That's good, in fact that's great. The side effects be damned.
An alternative ‘Agenda for Hope’
Owen Jones has written a nine-point ‘Agenda for Hope’ that he argues would create a fairer society. Well, maybe. I’m not convinced by many of them. Then again, it would be quite surprising if I was.
But it got me thinking about what my nine-point agenda would be — not quite my 'perfect world' policies, but some fairly bold steps that I could just about imagine happening in the next couple of decades. Unlike Owen’s policies, few of these are likely to win much public support. On the other hand, most of the political elite would think these are just as wacky as Owen's too.
Nine policies to make people richer and freer (and hopefully happier):
1) The removal of political barriers to who can work and reside in the UK. Removing all barriers to trade would increase global GDP by between 0.3% and 4.1%. Completely removing barriers to migration, though, could increase global GDP by between 67% and 147.3%. Those GDP benefits would mostly accrue to the poorest people in the world. We can’t remove these barriers everywhere but we can show the rest of the world how it’s done. Any step towards this would be good – I suggest we start by dropping the net migration cap and allowing any accredited educational institution to award an unlimited number of student visas.
2) A strict rule for the Bank of England to target nominal GDP instead of inflation, replacing the discretion of the Monetary Policy Committee. Even more harmful than the primary bust in recessions is what Hayek called the ‘secondary deflation’ that comes about as people, fearing a drop in their future nominal earnings, hold on to more of their money. That reduces the total level of nominal spending in the economy which, since prices and wages are sticky in the short run, leads to unemployment and a fall in economic output. NGDP targeting prevents those ‘secondary deflations’ and would make economic busts much less common and harmful. In the long run, we should scrap the central bank altogether and replace it with competition in currencies (see point 9, below).
3) Significant planning reform that abolished the Town and Country Planning Act (which includes the legislation ‘protecting’ the Green Belt from most development) and decentralised planning decisions to individuals through tradable development rights (TDRs). This would give locals an incentive to allow new developments because they would be compensated by the developers directly, allowing for a reasonably efficient price system to emerge and making new development much, much easier. The extra economic activity from the new home building alone would probably add a couple of points to GDP growth.
4) Legalisation of most recreational drugs and the medicalisation of the most harmful ones. I think Transform’s outline is pretty good: let cannabis be sold like alcohol and tobacco to adults by licensed commercial retailers; MDMA, cocaine and amphetamines sold by pharmacies in limited quantities; and extremely dangerous drugs like heroin sold with prescriptions for use in supervised consumption areas. The sooner this happens, the sooner producers will be answerable to the law and deaths from ‘bad batches’ of drugs like ecstasy will be a thing of the past. Better yet, this would bring an end to drug wars like Mexico's, which has killed around 100,000 people in the past ten years.
5) Reform of the welfare system along the lines of a Negative Income Tax or Basic Income Guarantee. As it is, the welfare system disincentivises work and creates dependency without doing much for the working poor. A Negative Income Tax would only look at people’s incomes (not whether they were in work or not in work), reducing perverse incentives and topping up the wages of the poorest earners. This would strengthen the bargaining position of low-skilled workers and would remove much of the risks to workers associated with employment deregulation. Of course, the first thing we should do is raise the personal allowance and National Insurance threshold to the minimum wage rate to give poor workers a de facto 'Living Wage'.
6) A Singaporean-style healthcare system to replace the NHS. In Singapore, people have both a health savings account and optional catastrophic health insurance. They pay a portion of their earnings into the savings account (poor people receive money from the state for this), which pays for day-to-day trips to the doctor, prescriptions, and so on. The government co-pays for many expenses but the personal cost disincentivises frivolous visits to the doctor. For very expensive treatments, optional catastrophic health insurance kicks in. This is far from being a pure free market system but it is miles better (cheaper and with better health outcomes) than the NHS. (By the way, if you really like the NHS we could still call this an ‘NHS’ and still get the superior system.)
7) A school voucher system and significant reform of the state education and free schools sectors. This would include the abolition of catchement areas and proximity-based admission, simplification of the free schools application process, and expansion of the free schools programme to allow profit making firms to operate free schools. These reforms, outlined in more detail in two ASI reports, would increase the number of places available to children and increase competition among schools to drive up standards.
8) Intellectual property reform. As both Alex Tabarrok and Matt Ridley have pointed out, our IP (patent and copyright) law is too restrictive and seems to be stifling new innovation. Firms use patents as barriers to entry, suing new rivals whose products are too similar to their own. In industries where development costs are high but imitation costs are low, like pharmaceuticals, patents may be necessary to incentivise innovation, but in industries like software development where development can be cheaper than imitation, patents can be a terrible drag on progress. Tabarrok recommends that we try to tailor patent length in accordance with these differences; as a sceptic about our ability to know, well, anything, I’d prefer to leave it to private contracts and common law courts to discover.
9) Last but not least, the removal of the thicket of financial regulation and the promise of bailouts for insolvent banks. Known as ‘free banking’, this system of laissez-faire finance has an extremely strong record of stability – though bank panics still occurred in free banking systems, they were much less severe and rarely systemic. Only once the government started to intervene in the financial system to provide complete stability did things really begin to go wrong: deposit insurance, branch-banking restrictions, and other prudent-seeming regulations led to extremely bad unforeseen consequences. The financial crisis of 2008 probably owes more to asset requirements like the Basel accords, which heavily incentivised banks to hold ‘safe’ mortgage debt over ‘risky’ business debt, than anything else. Incidentally, the idea that having a large number of local banks is somehow better than having a few large banks is totally wrong: during the Great Depression, 9,000 of America's small, local banks failed; at the same time not one of Canada’s large banks failed. The small banks were more vulnerable because, unlike the big banks, they were undiversified.
Now, if only there was a think tank to try and make these dreams a reality.
Equality: as cheap as 50p?
Peter Oborne argues that Ed Balls' pledge to raise the 45p top tax rate back up to 50p is a good idea. While the extremely high marginal rates (top main rate 83%, plus a 15% surcharge for "unearned income") of the 1960s and '70s might have been driven by "socialist envy", George Osborne's dropping the rate from 50p to 45p in was "profoundly shaming and offensive", Oborne contends. This is because, echoing Stanley Baldwin and his brand of Toryism, the conservatives should represent the whole country, not the rich or any other factional interest.
Apparently the Coalition has "devoted a great deal of effort to lowering the living standards of the poor", and this move to "make the rich richer" is inappropriate when the poor are getting poorer. I contend this by arguing that inequality is down to 90s levels under chancellor Osborne, while the worst-off in society are the only group to actually see their living standards improve the since the recession hit. And the (ugly, unpleasant, and regrettable) attitudes that have emerged towards benefits claimants are probably driving government rhetoric in that area, rather than vice versa.
In general, it annoys me when a columnist writes something apparently trading on what everyone just knows. Sometimes the common view is incorrect. Funnily enough, politics is the area where people err most profoundly and with the most regularity. And I would argue that Oborne is trading on falsehoods in his piece; would it still be a coherent argument if it started with the factual premise that inequality in the UK fell back below its 1997-8 low in 2011-12, 0.34 measured by the GINI coefficient? That the top 10% of earners endured the biggest blow to their incomes since the onset of the recession? And that the bottom 10% by income were the only one to see a rise in living standards taking inflation into account? I don't think so.
The IFS reports I link above predict that by 2015-16 inequality will rise back to roughly its pre-recession level, so perhaps Oborne could refocus his attack on the future inequality Osborne possibly has a hand in. But in all likelihood there is probably little the government can do about inequality over the long-term, caused as it is by very fundamental trends and robust as it is to institutions even such as the USSR's. Most of the extra inequality since the 60s and 70s has come from couples engaging in much more assortative mating. And very long-term trends are mainly dominated by heritability of social class—those with Norman surnames are 28% more likely than a random sample of similar others to get an Oxford place.
Just how far we've come in two decades
OK, so this is largely a result of Moore's Law allied with some clever technologists but still, it's interesting to see quite how far it is that we've come.
The back page of the front section on Saturday, February 16, 1991 was 4/5ths covered with a Radio Shack ad. There are 15 electronic gimzo type items on this page, being sold from America’s Technology Store. 13 of the 15 you now always have in your pocket.
...
You’d have spent $3054.82 in 1991 to buy all the stuff in this ad that you can now do with your phone. That amount is roughly equivalent to about $5100 in 2012 dollars.
I've bought myself an off contract smartphone recently for around £100, or $150. Which shows how far we've come over these couple of decades really.
Which in and of itself is just an interesting observation (as is the one that the run of the mill smartphone these days packs more pure computing power than a Cray 2 from the early 1990s). However, this sort of technological change is something that our economic statistics deal very badly with. For several unfortunate reasons.
The first being that we do indeed try to adjust for the improving quality of things, through what are known as "hedonic" adjustments. But there's no one who really thinks that we've got this right as yet. Secondly, the advances in such things as our phones allow us to do things that were simply impossible before. And there's no real way os squeezing those into the GDP statistics. For the third reason: and awful lot of what we can do with these new technologies is actually free at the point of use. So therefore, not being charged for, it dsoesn't turn up in the GDP figures. And fourthly, those things that we used to be able to do but now can do them more conveniently have actually fallen in price. And given that it is the market prices that GDP tracks the contribution here is actually negative.
And this is indeed a problem with our economic statistics. I think a case could be made (I'd argue it, but not want to have to prove it) that the coming of smartphones has been recorded in GDP as a reduction in GDP. Which, given that we can now all do things we couldn't before, do things we could more cheaply, and do other things simply better seems like a remarkable indictment of the basic statistic.
But then we all know that GDP isn't the be all and end all of everything: it's maximising utility that is. GDP is just an indication that there might be more utils out there to enjoy: but not, sadly, a terribly accurate one.
A capitalist crime which should be heavily punished
Much of my time is spent in explaining how this capitalist/free market mix leads to the best of all possible outcomes. Except when I'm explaining that in this or that instance it needs a little nudge or limitation. However, there are times when it's necessary to condemn, in no uncertain terms, the purported actions of certain capitalists or capitalist firms. And this alleged price fixing (and do please note that "alleged" there) in the wages of engineers in Silicon Valley is one such instance. The claim is that the big companies agreed not to try and poach staff from each other thereby reducing the wages spiral that might have ensued:
In early 2005, as demand for Silicon Valley engineers began booming, Apple’s Steve Jobs sealed a secret and illegal pact with Google’s Eric Schmidt to artificially push their workers wages lower by agreeing not to recruit each other’s employees, sharing wage scale information, and punishing violators. On February 27, 2005, Bill Campbell, a member of Apple’s board of directors and senior advisor to Google, emailed Jobs to confirm that Eric Schmidt “got directly involved and firmly stopped all efforts to recruit anyone from Apple.”
It is said (note, alleged) that this practice them spread across the major firms in the area. And there's two major problems with this sort of cartel behaviour. Obviously, one is that the wages of said engineers were not bid up and they did not gain the full value of their scarcity. Sure, companies reported higher profits as a result, shareholders made more money. But we're not in fact capitalists, trying to make sure that this is what happens. We're actually free marketeers and this is one of those times when the two creeds conflict.
The second is perhaps even more important for us market types. One way of looking at said market is that it is the Great Calculating Engine of our society. Indeed, the only one we have that can have any possibility of correctly allocating resources. And if, through coordinated action such as this, people then damp those prices then our market allocation is going to be wrong. For example, depressing the wages of engineers in California would have led to some (maybe only a few, but this all happens at the margins of course) quants deciding to go off to Wall Street instead. And yet free market pricing would have told them that their skills were more highly valued in the computing rather than finance sectors.
At root of course this is again that conflict between markets and capitalism. We marketeers are very sure indeed that while capitalism is all very well it is competition in markets that harnesses and controls it. And if the capitalists do ever collude, whether it be in the prices for vitamins or the pay of the workers, then we're going to end up with a very much sub-optimal outcome. Which is why if we do find such collusion that we want to punish it very severely indeed.
If this sort of thing had happaned in Europe then the EU could levy fines of up to 10% of global turnover of each company that participated. I don't know what the potential US penalties are but I wouldn't think those numbers would be out of line with a just outcome.
We simply cannot allow such cartels to operate and should punish those who try severely.
Explaining the boom in the profit share in the US economy
That chart is of corporate profits in the US economy as a percentage of GDP. And it's the cause of much muttering: see how the little guy is getting screwed over by the corporate giants etc.
But we also need to add this little observation to it:
it is important to realize that around 50 percent of the SP500′s earnings are generated overseas
Total profits for the constituents of the S&P 500 index are of the order of $1.1 to $1.12 trillion in this past year (not all have reported yet so difficult to be exact). And if 50% of them are overseas profits then that's $600 billion or so.
Or, when we put it into the context of US GDP, that's about four percentage points of GDP.
Taking that off the 11% of GDP that is US corporate profits leaves us with 7%, or much more like the long run average.
The rise in GDP of corporate profits has at least something to do with the increased globalisation of the economy rather more than it does with the oppression of the workers by capital. As so often, the devil is in the details of the measurement.
One such detailed point: we could assume that foreigners must also be making profits in the US and therefore there's 3 or 4% of GDP being paid out again to foreigners. But that's not actually quite how they measure it, there's an asymmetry here. Corporate profits are measured from Federal income tax returns: companies who have invested in the US will be reporting their US profits on such forms. As will US corporations who have made foreign profits. Thus this measure includes the corporate profits made in the US by foreigners as well as the foreign profits made by US companies.
The machines are going to steal all our jobs!
The Economist has another of those breathless pieces worrying about what's going to happen when the robots come for all our jobs. There's one basic error in the piece and one slightly more technical.
The basic error is that they fail to note that when the robots have taken all our jobs then we'll all be incredibly rich. One of the comparisons they make is to the first industrial revolution and that's appropriate. So, let us think about what happened when the mechanisation of cotton production killed off the hand weaving (and linen although more slowly) industries. Yes, certainly, some people lost their jobs: but the entire population now became rich enough to be able to wear cotton underwear simply because the production costs of cotton fell so far. And only those who have suffered through the woollen kind will know how rich that makes us all.
It's a very, very, basic observation: if the machines are making everything then everything becomes extraordinarily cheap. This is the same statement as the one that the machines taking all our jobs makes us all very rich indeed.
The more detailed mistake is here:
But though growth in areas of the economy that are not easily automated provides jobs, it does not necessarily help real wages. Mr Summers points out that prices of things-made-of-widgets have fallen remarkably in past decades; America’s Bureau of Labour Statistics reckons that today you could get the equivalent of an early 1980s television for a twentieth of its then price, were it not that no televisions that poor are still made. However, prices of things not made of widgets, most notably college education and health care, have shot up. If people lived on widgets alone— goods whose costs have fallen because of both globalisation and technology—there would have been no pause in the increase of real wages. It is the increase in the prices of stuff that isn’t mechanised (whose supply is often under the control of the state and perhaps subject to fundamental scarcity) that means a pay packet goes no further than it used to.
So technological progress squeezes some incomes in the short term before making everyone richer in the long term, and can drive up the costs of some things even more than it eventually increases earnings. As innovation continues, automation may bring down costs in some of those stubborn areas as well, though those dominated by scarcity—such as houses in desirable places—are likely to resist the trend, as may those where the state keeps market forces at bay. But if innovation does make health care or higher education cheaper, it will probably be at the cost of more jobs, and give rise to yet more concentration of income.
This is Baumol's Cost Disease of course. Those things where it is more difficult to increase the productivity of labour in their production will rise in price in comparison to those things where raising that productivity is easier. Exactly those services like college education and health care complained about.
But...but...if we're now stating that we're worried about automation attacking the jobs in those areas we're in fact making exactly the same statement as that they're about to become 20 times cheaper. Just as happened with the widgets. You can't both complain about the price reductions that come from the robots stealing our jobs and also about increasing inequality. For if everything falls, over only 30 years, to one twentieth of the starting price then what the hell is there left to have any consequential inequality about?
Positional goods? Sure, the Louvre will still have the world's only Mona Lisa, there will still only be a handful of houses in Eaton Square but beyond that, seriously who cares? The end state, if the robots to start doing all the work, is that we get all the food, healthcare, clothing, housing (but perhaps not exactly where we might want it), education and all the rest that our greedy little hearts could desire.
And this is something that people think governments have to start having policies about?
Heavens preserve us.
What's the true free market monetary policy?
Let's imagine we are in a world where central banks are given key roles in the macroeconomy, and have been for decades or even centuries in almost every country. In this imaginary world, studies into the relative efficacy of free banking regimes have been undeservedly overlooked, and the orthodoxy among major economists, even ones otherwise sympathetic to free markets is that they are a bad idea. Major policymakers, let's imagine, are completely unaware of the free banking alternative, and most even use the term to mean something completely different. Proposals to enact free banking have not been mentioned in law making chambers for decades or centuries, if at all. It has not been in any party's policy platform for a similar period of time, in this imaginary world.
What's interesting about this imaginary world is that it is in fact our world. Economists like George Selgin, Larry White, Kevin Dowd (among many others) have done very convincing research about the benefits of free banking. And free banking may one day become a real prospect, perhaps in a new state or a charter city. But free banking has lost the battle for the time being, and abolishing the central bank and government intervention in money is as unlikely as abolishing the welfare state. Now one might say that if free banking is a desirable policy, it is worth continuing to wage the intellectual war for the benefit of future generations, who could benefit from the scholarship. Work done now could end up influencing and improving future monetary policy.
I do not discount the possibility this is true. At the same time, free banking is a meta-policy, not a policy—a way of choosing what monetary regime to enact, rather than a specific monetary regime. After all, it is at least possible that free banks could together target consumer prices, the GDP deflator, the money base, the money supply measured by M2, nominal income/NGDP. And for each of these different measures there are an infinite number of theoretical growth paths, and a large number of realistically plausible growth paths they could aim for. Now, free bankers say that the market will make a good decision, and I can buy that. But let's say we're constrained to choose a policy without the aid of the market mechanism: can we say there are better or worse central plans?
The answer is: of course we can! Old-school monetarism, targeting money supply aggregates, was a failure even according to Milton Friedman, whereas CPI targeting, for all its flaws, delivered 66 quarters of unbroken growth and a period so decent they named it the Great Moderation. The interwar gold standard brought us the stagnation of the 1920s (in the UK) and coming off us brought us our relatively pleasant experience of the Great Depression. Literally the order in which countries came off the gold standard is the order they got out of the Great Depression. And even though the classical gold standard worked pretty well, few of its benefits would obtain if we went back. Some central plans (the interwar gold standard, M2 targeting) don't work, some work a bit (the classical gold standard, CPI) and arguably some work pretty well (NGDP targeting is one in this category, according to Friedman, Hayek and I). If we are stuck with central planning, then why not have a good central plan?
And just because I'm allowing the term "central planning" to describe NGDP targeting, we needn't describe it as "government intervention in money". I don't think they are really the same thing. "Government intervention in money" brings to mind rapid inflation, wild swings in the macroeconomic environment; in short the exact circumstances that NGDP-targeting aims to avoid. Targeting aggregate demand keeps the overall macro environment stable—a truly neutral monetary policy—allowing firms and households to make long-term plans, and preventing recessions like the last one, caused as it almost certainly was by drastic monetary tightening. Indeed, as monetary policy determines the overall path of aggregate demand, we might easily call "sound money" policies aiming for zero inflation or a frozen base as dangerous government meddling—they allow the actually important measures like nominal income to fluctuate drastically.
Consider an analogy: school vouchers. Many libertarians may favour a system where parents can spend as little or as much as they want on schooling (considering distributional concerns separately), rather than having central planners decide on the voucher-set minimum. But we usually see a voucher system as an improvement on the status quo—parents may not be able to fully control how much is spent on their children's education but at least they can pick their school. Popular and successful schools grow to accommodate demand, while unpopular and unsuccessful schools can be wound down more quickly. Libertarians may see this as a way from the ideal situation, but none would therefore denounce the policy. The analogy isn't perfect, but I like to see NGDP targeting as similar to school vouchers, versus status quo schooling as the CPI target. Libertarians shouldn't make the perfect the enemy of the good.