Today's prize for economic illiteracy goes to Aditya Chakrabortty

This is painful, even for The Guardian, even for the history graduate that writes their economic leaders:

This is what the Centre for Research in Socio-Cultural Change terms “social licensing” in its latest book, The End of the Experiment. The academics’ suggestions have been followed by one council in north London, Enfield. Officers and researchers sat down and worked out how much money its 300,000 residents sent the way of big businesses: 11 Tesco stores, for instance, provided the PLC with around £8m of its annual profit. And what did the area get back? Not very much, but the highlight included a community toilet scheme and some charitable giving from the supermarket’s corporate social responsibility department.

And so the council has started asking big businesses, such as utility firms, what they had done for Enfield recently. They’ve begun hassling banks to lend more to local businesses, the likes of British Gas to give more of their local work to local contractors with local staff – or run the risk of being named and shamed in the local press. It may sound small, but imagine if the same approach were taken by Holyrood or Cardiff – or by Westminster.

What?

To take that example of Tesco, so what did Enfield get back in return for that £8 million of profit? Given supermarket profit margins it got a couple of hundred million pounds worth of groceries. Something that's rather more important that piddling around with the community lavvies you might think.

This idea that the value to us of what an organisation does is in what it does not produce is simply insane. The value to us of a producing organisation is in what it produces. The value of Google to us is that we get to Google, the value of Starbucks to us is bad coffee and the value of Tesco in Enfield is that people have somewhere to buy their loo roll and something to eat. And it's absolutely no use trying to insist that a supermarket isn't providing value: if it wasn't the good people of Enfield wouldn't be spending £200 million a year there, would they?

Try to think about this rationally for a moment. The NHS provides absolutely nothing towards local loos for local people, pays not a bean in taxation and yet most would agree that it does provide something of value. Perhaps not as much value as the same amount spent in another manner would but we do indeed value the fact that it occasionally manages to treat patients. The value to us of the NHS is in what the NHS produces: medical treatment. The value of Tesco to Enfield is in what Tesco produces. Why is this so difficult for people to understand?

Minimum wage debate: probably not over

The debate among economists over whether (higher) minimum wages cause (more) unemployment seems to go on forever. Most published results (and an even greater fraction of methodologically sound published results) find that minimum wages reduce employment. But this doesn't settle the result, and smart, eminent economists like Arindrajit Dube publish papers arguing that with different methodologies and/or correcting for appropriate trends, you cannot find a link. Though this seems to go against our basic model of the microeconomy, economists argue that employers of the low-skilled are monopsonists—single buyers, the converse of monopolies, single sellers—and may even want more labour when its price rises. Those who do believe that minimum wages put people out of work, when faced with results finding they don't, suggest that maybe this just a temporary effect; in the long run workers will be replaced with automation a la modern checkouts, or fewer higher-skilled people once they've had time to search. Or alternatively, less will be spent on working conditions or other benefits.

Given this morass of disagreement, a new paper from Jeffrey Clemens and Michael Wither is unlikely to change any minds, but it's still an interesting result. They use nifty controls to establish that binding minimum wages cause unemployment, lower wages from work, and worse work progression for the low-skilled. This dearth of work experience, the authors say, makes them less likely to join the lower middle class. What's more, because their sample is very broad and spread out across the entire US, they believe their results are uniquely good for extrapolating to the country as a whole.

We estimate the minimum wage's effects on low-skilled workers' employment and income trajectories. Our approach exploits two dimensions of the data we analyze. First, we compare workers in states that were bound by recent increases in the federal minimum wage to workers in states that were not. Second, we use 12 months of baseline data to divide low-skilled workers into a "target" group, whose baseline wage rates were directly affected, and a "within-state control" group with slightly higher baseline wage rates. Over three subsequent years, we find that binding minimum wage increases had significant, negative effects on the employment and income growth of targeted workers. Lost income reflects contributions from employment declines, increased probabilities of working without pay (i.e., an "internship" effect), and lost wage growth associated with reductions in experience accumulation.

Methodologically, we show that our approach identifies targeted workers more precisely than the demographic and industrial proxies used regularly in the literature. Additionally, because we identify targeted workers on a population-wide basis, our approach is relatively well suited for extrapolating to estimates of the minimum wage's effects on aggregate employment. Over the late 2000s, the average effective minimum wage rose by 30 percent across the United States. We estimate that these minimum wage increases reduced the national employment-to-population ratio by 0.7 percentage point.

Things really are getting better

What are we to make of the UK Autumn Statement? The recovery is stronger than predicted, unemployment has fallen faster than anyone can remember, inflation is lower, interest rates are falling... the government is going into an election with the best economic figures in memory. All of that, the strong pound, growth in the 2-3% range, earnings up, inflation down - all of that should help the Conservatives, come the general election on May 8th.

The deficit is still a problem...bigger than forecast. But interest rates have been kept low, so borrowing has not been a strain: the bond markets have not been spooked.

As for the next election – and the Autumn Statement is very much a political thing – it looks like a large number of MPS, maybe 80 or more,, will be neither Conservative nor Labour, a big change on previous governments. The worst prospect is for a government with several coalition partners. One coalition partner is manageable – two or three, not so.

An unstable coalition partnership of several parties would be a disaster. The markets would just go into a tailspin. Ho hum. Right now, the government is benefiting from ultra-low interest rates. Again, if that does not last - and how can it - things might look much messier. The Conservatives want to cut public spending to more like 35% of GDP, the lowest it has been in decades. But if there is a complicated coalition arrangement, that is a no-hoper.

The eurozone remains the biggest trhreat to the UK. It is flatlining, going nowhere. That is one reason why the Office for Budget Responsibility has downgraded its growth forecast.

The bad news is that those on low income have seen almost no rise in their earnings since the financial crash. Those on top incomes have seen wages rise 20%. This is not a very even recovery.

Meanwhile, people have been lured off benefits and into jobs, thanks to the rise in tax thresholds that the Adam Smith Institute was promoting long before the Liberal Democrats thought about it – isn't it crazy that folk on the minimum wage should pay tax at all?

Ho hum, indeed. It's the economy, stupid. The Tories should have done a lot more to balance the books. But they may have done enough to convince us that things really are getting better.

A solution to the reclining airplane seat dilemma

Anybody who has to fly home for Christmas will know the reclining seat dilemma. It's kind of annoying if the person in front of you reclines their seat and usually forces you to do the same. (Which puts the person behind you into a tight spot and forces them to recline too, and so on.) Josh Barro, invoking the great economist Ronald Coase, suggests paying the person in front not to recline, but Virginia Postrel disagrees:

This solution, however, is highly unrealistic. It waves away the central theme running throughout Coase’s work: the problem of transaction costs. Making and enforcing contracts, Coase emphasized, isn’t free. And when it comes to airline seats, it’s a lot more costly than Barro admits.

In theory, I could have offered the guy in front of me money to sit up, but even assuming that my fractured Italian had been up to conducting the negotiations and that he wouldn’t have gotten nasty in response to my overtures, how would I have enforced the deal? It’s not a simple problem, and certainly not a cost-free one. Suggesting that as long as property rights are well-defined, you can simply make a deal misunderstands what Coase was all about. He was obsessed with transaction costs. They explain why we have institutions (including firms), not just individual bargains.

It's also kind of embarrassing to do this, because some eccentrics think 'commodifying' parts of everyday life is a bad thing. Postrel's solution is a little more elegant. Divide the plane down the middle, with seats on the left able to recline and seats on the right fixed in position. If it turns out that people prefer one side to the other, charge more for that and less for the other. It's so simple it might just work.

Let them eat cake...and buy discounted TVs

Already (and keep in mind they’re five hours behind), Americans are storming Wal-Mart, Best Buy, Macy's (and a whole lot of small, independent shops too) to snag the best Christmas deals of the season. It’s Black Friday- the biggest shopping day of the year in the States, when stores open ‘early’ and offer huge discounts on otherwise pricy, luxury goods. Unlike the Brits, who started looking forward to Christmas post-Halloween, Americans had to at least pretend they weren’t listening to Bing Crosby on their iPods until the day after Thanksgiving; and now, with less than a month till Christmas day, shoppers will spend well over $1billion today alone to make up for their tireless waiting.

Over the past few years, this all-you-can-shop American trend has spilled over to the UK, with Amazon, Apple and Wal-Mart’s Asda taking the charge to bring discounts, up to 70%, to British consumers. Still in its early phases of becoming any kind of British tradition, the demand from customers for these kinds of deals continues to sky-rocket; last year, according to Visa’s estimate, £1million was spent on its cards every three minutes, and it’s expected this year’s charges will be up 22%.

And this year’s looking even bigger:

However, this year, the day is expected to be even busier. Black Friday 2014, scheduled for November 28, should be the biggest online shopping day ever in the UK.

Christopher North, managing director of Amazon.co.uk, said: “Black Friday took an incredible leap forward in 2013 with so many more customers taking advantage of the great deals on that day, resulting in sales of over 4m items for the very first time in our history.

“This year, we are offering more deals and savings than ever before and we are expecting record numbers to benefit from Black Friday Deals Week.”

Some take a moral stance against Black Friday, arguing that it promotes consumerism and unnecessary purchases; and some in the UK have gone so far as to say it defies British identity, as Black Friday has, until recently, been a post-Thanksgiving, US tradition.

It seems almost too obvious to point out that the the millions of pounds that will be spent in the UK today are a huge boost to business; benefiting not only businesses and their employees, but the customers themselves who are able to buy electronics and goods they could not otherwise afford at hugely discounted prices. It's all very well to claim the moral high-ground on consumerism if you and your family want for nothing; but for many customers, necessities in the digital age (like computers and phones for their kids) aren't accessible at their normal prices.

As for British identity - Black Friday is far too new to the UK for us to know how it–as a sales pitch or as a tradition–will play out in the future. Under no circumstances should Britain adopt the crazy shop-till-you-drop celebrations if it doesn't want to; but no one can deny the huge, and ever-growing, demand from British consumers for the Black Friday tradition. And as long as there's demand, let the rush commence.

Pay is determined by your best alternative job

Economic theory tells us that we really ought to be paid our marginal productivity. And no one at all believes that that actually happens in detail. However, we can take a step back to a point which even Karl Marx got, which is that your pay will reflect the demand for labour. More specifically, the better the alternatives you have the more your pay is going to go up. And here's a nice little story from the Frozen North to illustrate that:

There’s been a lot of attention paid to how Canada’s oil boom has helped make gasoline cheaper. What many people may not realize is that the boom is also driving up the prices they pay for burgers and steaks.

Surging energy investment in Prairie Provinces, home to most of the nation’s farms and cattle ranches, has boosted domestic crude output to a record and sent pump prices to a three-year low. That’s led to jobs on drilling rigs or pipe crews paying two-thirds more than those in livestock, luring cowboys and beef-plant workers to the oil patch.

By cowboy there they really mean more what we English might call a cowman, rather than some Bill Cody type. But it's obvious what is happening. There's no more to do out on the prairie than just oversee the creation of cowpats and that's driving up the wages of those who are there. It's the very same process that leads to a hairdresser making very much more money in the UK than one in China does: the pay of hairdressers is not determined directly by the productivity with comb and scissors, rather by the pay on offer in the next alternative job.

This doesn't mean that the economic theory is wrong though: only that it operates in a rather clunky manner and so is something that gets tended towards rather than an equilibrium state at which we all always exist. As higher productivity jobs appear then they will tempt away some of the labour force. And so all wages tend towards the productivity of the work being done.

At which point we might have a little snark about the UK. There's a lot of complaining going on that the jobs being created these days aren't very well paid, something which is true. But it's also true that the highest productivity jobs in the UK have for some decades been those in wholesale finance in The City. Which is exactly the sector that those same complainants are determined should shrink.

Just like oil wells push up wages for cowboys, so does shutting down highly paid jobs in banking reduce other wages in the same economy.

It's the minimum wage that's keeping youngsters out of work

From the Independent: 

The young are the new poor

The Independent - Cahal Milmo

A study by the Joseph Rowntree Foundation has warned that young adults and employed people are now more likely than pensioners to be living in poverty in Britain because of the surge in insecure work and zero hours contracts.

The reason for this is the minimum wage, which also explains why we have nearly 1m youngsters out of work entirely.

While the minimum wage for young people does not seem high – £5.13 an hour for 18-20-year-olds, and £3.79 for under-18s – the fact is that many young people do not provide that much value to an employer. Indeed, when National Insurance and other costs are added, the value of an unskilled young person is often negative. Young people have to learn the habits of work, turning up on time each day, the skills needed in the job, and 'soft' skills such as how to get along in a team with colleagues, how to deal with customers, how to react when things go wrong, and so on. It may take many years of training and job experience to lean these skills.

That is why for centuries we have had apprenticeships in which young people earn very little but learn a trade. But minimum wages – plus the heavy burden of workplace regulation which makes it very difficult to let someone go once they have been hired, however inappropriate they turn out to be – make employers more reluctant to take on people with few or no skills and experience.

The result is that minimum wages hurt those they are supposed to help. Employers do not take on young people, or those without skills, or those nearing retirement, or people with poor social or language skills, or ex-prisoners, or people with mental health issues, because their business cannot carry the cost of giving them the support and training they need to become more productive than the cost of employing them.

Is private currency history repeating itself?

As I and others have said before, free banking & competitive currency provision either completely ignored, or unfairly dismissed by opponents who really don't know too much about the system. A recent example came on the FT's Alphaville blog. By author Izabella Kaminska, and entitled "Private money vs totally-public money, plus some history", it purported to show how cryptocurrency was just a rerun of earlier monetary struggles, looking specifically at the formation of the Bank of England:

As the BoE’s historical timeline helpfully points out, the BoE came into being when a private syndicate decided to risk all in 1688 by providing the UK government with funding when no-one else was prepared to do so. This ultimately proved to be a very good decision. It turns out lending money to government on terms you can enforce and control can be very profitable, especially if it leads to wise public investments that improve the wealth of the nation and make it easier to collect taxes as a result.

Soon enough the Bank’s success meant it could raise financing for both the government and private interests from almost anyone, issuing notes and deposits to all those who were prepared to do so.

Before the Bank knew it, its notes had become the most liquid and trusted in the land.

Open and shut then—free banking evolves naturally into superior central banking! Or maybe not. As George Selgin pointed out in the comments.

Ms. Kaminska goes out of her way to dismiss the famously efficient and stable Scottish system as an "oligopoly" without even bothering to offer any evidence that the banks in that system colluded or otherwise behaved differently than they might have had entry into the industry been unrestricted. (For her information on the Scottish system Ms. Kaminska relies on a single blog post that in turn draws on some untrustworthy sources, happily ignoring the extensive literature on the other side of the question.)

Ms. Kaminska then imagines that the English system's only fault lay, not in the dangerous concentration of privileges in the Bank of England, awarded it not owing to any enlightened concern about stability but simply in return for its fiscal support of the English government, but to the fact that that monopoly was as yet not complete!  In fact a currency monopoly is extremely dangerous because it immunizes the monopoly bank from the normal discipline of routine settlement, making it capable of acting as a sort of Pied Piper to less privileged banks.  (Peel's Act itself, in turn, caused trouble by undermining the English system's ability to accommodate changes in the British public's demand for currency.)

In light of these facts, Ms. Kaminska's claim that English banking crises were caused by smaller joint-stock note issuing rivals, which were at last allowed to compete with it, albeit only outside of the main, metropolitan market, beginning in 1833, is utterly--I was going to write "laughably" except there's nothing fun about it--mistaken, as she might have discovered had she bothered to read, say, Walter Bagehot's Lombard Street, say, instead of copying and pasting from the Bank of England's own self-serving web pages. She would there have come across Bagehot's careful account of how England's artificially centralized "one reserve" system, dominated by the Bank of England in consequences of its accumulated privileges, exposed it to financial crises to which Scotland and other less centralized ('"natural") banking systems were immune.

Can we stop talking about the alleged 'gender wage gap' now?

Many are boasting good news on the ‘gender wage gap’—I agree, it’s great news: the Office for National Statistics’ findings offer more proof that wage gaps have very little to do with gender, and much more to do with choices each gender is prone to make. From the BBC:

The average full-time pay gap between men and women is at its narrowest since comparative records began in 1997, official figures show.

The difference stood at 9.4% in April compared with 10% a year earlier, the Office for National Statistics (ONS) said, a gap of about £100 a week.

This as well:

Hourly earnings figures reveal that, in April 2014, women working for more than 30 hours a week were actually paid 1.1% more than men in the 22 to 29 age bracket and, for the first time were also paid more in the 30 to 39 age bracket…

…The government said that, from next year, it was extending the rights for shared parental leave. It had also invested in training and mentoring for women to move into higher skilled, higher paid jobs, and guidance to women looking to compare their salaries with male counterparts.

Women, from the start of their careers, are now earning a higher salary than men; and, if they choose to make the decision to stay in the work force, they are more likely to be promoted than their male counterparts as well.The real gap, it seems, is not between women and men, but between mothers and child-less women. Leaving a job early on in one's career or for an extended period of time to have children will impact a women’s salary when she returns to the work force.

As this is the case, I think the government is probably right to extend rights for shared parental leave (though the money put into training will surely be a waste; women who are ambitious and attracted to careers in science, business, and formerly male-dominated sectors aren’t having much trouble pursuing them). But anything legislated from the top-down can only go so far to change cultural opinions that have been in place for centuries about the role of women and the household.

In reality, women’s choice in their private and home lives will be the greatest determinate as to what further changes we see in wage gaps. It seems there's evidence that good economic climates actually lead more women to stay at home with their kids rather to go out and get jobs - at the same time, we are witnessing an increase in stay-at-home-dads, which, most likely, has multiple reasoning to it: more women are demanding to work, and more men feel comfortable making the choice to stay home.

Either way, it seems there is no obvious discrimination between men and women when they enter the work place; as far the element of motherhood is concerned, we should be less focused on the numbers and far more focused on ensuring that women are not being socially pressured, either way, to make any decision that is not completely their own.

As we've said before there's something a little odd about UK inequality

We're often told that the UK is one of the most unequal countries in Europe. We're also often told that this is bad, very bad, and something must be done. We've pointed out a number of times that there's another difference in the UK economy, something that makes us rather different from other European economies. And that's the massive importance of London in our economy. In the latest release of figures from the ONS we can see this quite clearly too:

The UK's highest earners live in Wandsworth, Westminster, and Richmond upon Thames - all in London.

The weekly wage of the average worker in those areas was £660.90, £655.70 and £655 respectively in April 2014.

At the other end of the spectrum, the average weekly earnings of someone in West Somerset were just £287.30.

The ONS prefers to use the median as its measure of average earnings “as it is less affected by a relatively small number of very high earners and the skewed distribution of earnings”.

Because we're using the median we're not just recording those bankers in the City there. This is the number which 50% of the people earn more than and 50% less than in each area. And a goodly part of that recorded UK inequality is because of these regional differences in income.

It's also true that living costs vary wildly across the country. Most especially housing costs of course although that's not all. London prices for a pint would choke a fellow from West Somerset just as much as rents or house prices would do.

Given that this is all so then actual inequality is rather lower than we're always told it it. For, of course, we should, if we're going to be concerned about inequality at all, be concerned about inequality of consumption. And if people in one part of the country have higher wages but also face higher living costs then that's an inequality that shouldn't be concerning us.

In no other European country is the capital such a dominant force or influence in the economy,. Thus our inequality is different from their: and arguably our inequality is lower than it is elsewhere, given this specific difference.