Perhaps we should take Corbynomics seriously?
Given the polling numbers perhaps we should at least think about taking Corbynomics seriously? So, to the fountainhead of all things Corbynomics, Richard Murphy:
This process requires three things. First, high quality economic data on what is really happening in the economy, and far too few economists have any experience with that.
That is rather funny for as we've repeatedly pointed out Murphy has only the shakiest grasp of economic data. However, there's more here. For what he's really saying is that if only the policy makers had more information then they really would be able to plan that economy. Which rather runs foul of the point made in Hayek's Nobel lecture, that we simply cannot get that sort of information out of an economy in anything like useful time:
This brings me to the crucial issue. Unlike the position that exists in the physical sciences, in economics and other disciplines that deal with essentially complex phenomena, the aspects of the events to be accounted for about which we can get quantitative data are necessarily limited and may not include the important ones. While in the physical sciences it is generally assumed, probably with good reason, that any important factor which determines the observed events will itself be directly observable and measurable, in the study of such complex phenomena as the market, which depend on the actions of many individuals, all the circumstances which will determine the outcome of a process, for reasons which I shall explain later, will hardly ever be fully known or measurable. And while in the physical sciences the investigator will be able to measure what, on the basis of a prima facie theory, he thinks important, in the social sciences often that is treated as important which happens to be accessible to measurement. This is sometimes carried to the point where it is demanded that our theories must be formulated in such terms that they refer only to measurable magnitudes.
It can hardly be denied that such a demand quite arbitrarily limits the facts which are to be admitted as possible causes of the events which occur in the real world. This view, which is often quite naively accepted as required by scientific procedure, has some rather paradoxical consequences. We know: of course, with regard to the market and similar social structures, a great many facts which we cannot measure and on which indeed we have only some very imprecise and general information. And because the effects of these facts in any particular instance cannot be confirmed by quantitative evidence, they are simply disregarded by those sworn to admit only what they regard as scientific evidence: they thereupon happily proceed on the fiction that the factors which they can measure are the only ones that are relevant.
And we also have a certain empirical problem as Cosma Shalizi has pointed out at great length. we do not in fact have a utility function that we can attempt to optimise. And even if we did we'd need another 100 iterations of Moore's Law to be able to run a computer to optimise that function that we don't have.
Both theory and empirics tell us that Corbynism won't work. Simply because an economy is too complex a thing to plan. Therefore, let us not take Corbynomics seriously.
Raising the minimum wage does cost jobs
We've been told, as with the more ludicrous tales from the US, that raising the minimum wage doesn't cost any jobs. No Siree! we can just increase the price of labour and no one's going to start employing less of it as a result. Well, isn't that nice? Except when people start to tell us how this is going to happen that explanation just falls apart:
The government must focus on unloved sectors such as hospitality and retail, if it is to tackle Britain’s lamentable productivity record, according to a new analysis by thinktank the Institute for Public Policy Research.
Tony Dolphin, the IPPR’s chief economist, said that while the government tends to target support at the highly skilled workers in advanced manufacturing, it is the low-paid staff behind bars and checkouts whose performance may be critical to sustaining Britain’s recovery.
Well, OK, this is from IPPR, so we'll not expect them to understand the economics of what they're saying, will we? But here's their adaptation mechanism:
But Dolphin said the chancellor’s bold decision to raise the minimum wage to £9 by 2020 could help, by giving firms an incentive to invest in technology and training to get more out of their lower-paid staff, who will gradually become more costly to employ.
“Provided that it does not lead to rising prices, this welcome move will put pressure on firms to boost productivity in order to maintain their profit margins,” the report said.
We'll just raise productivity instead!
Well, yes, except consider what raising productivity means. In order to make 100 sandwiches the deli requires 10 workers. Now we raise the productivity of sandwich makers so that we only need 5 workers to make 100 sandwiches. Well, great: but note what has happened: to make 100 sandwiches we only need 5 workers, not 10. That's a loss of jobs, isn't it?
Sure, it's also equally true that our original 10 workers could now produce 200 sandwiches: but what's the demand for sandwiches going to be? We all eat more because labour has become more productive? We think not really.
It's entirely true that increased labour productivity is the key to increased lifestyles for us all: it's almost the definition of us all getting collectively richer. But increased labour productivity also means, by definition, less demand for labour in that first stage.
To argue that an increased minimum wage will be dealt with by increased productivity is to insist that there will be unemployment effects from this increased minimum wage.
Out of their own mouths and all that, eh?
Milk markets are not hard to udderstand
You can lead a cow to a supermarket, but you can't make it raise its prices. The supermarket, that is. Because if one supermarket did, its customers would all desert to the ones that didn't. So what's the point of the farmers' protest? What will change? Dairy farming is yet another industry going through a technological revolution; and when that happens, some lose out. But the ultimate result is cheaper (and better) products for consumers. And as Adam Smith reminded us, the sole end of production is consumption. Why undertake the bother and expense of production, otherwise?
True, there are other factors. The world is pretty flush with milk right now. And Europe is particularly flush, thanks to EU subsidies. Yes, there is less subsidy than there was, and it is less related to production – remember the Milk Lake and the Butter Mountain? An obscene waste of animal products. But we still have the Basic Payment Scheme, all those Agri-Environmental Schemes, Private Storage Aid (i.e. bribing processors to hold milk products back when prices are low), the School Milk Scheme, not to mention Import Tariffs against other world producers.
The result is that today, about a third of the income of England's dairy farmers comes through subsidies. If they sold their herds and retired to Bournemouth they wouldn't get them any more, so they carry on, producing more milk than the nation actually wants.
The dairy farmers' argument is that milk is difficult to transport – it is bulky and you have to keep it cool – so we need to produce milk locally. There is some truth in that, but it is a two-edged sword: because since supply sources are so restricted, you need to be prepared for some pretty spectacular price rises and falls from time to time. Like now. And if consumers cannot get dairy products from other producers because of import tariffs, consumers lose out too.
But back to technology. Britain is a terrible place to produce milk. The winters are cold and wet, so you have to bring your herd into shelters and give them heat, silage and hay (and muck them out), all of which adds to the cost. It's Adam Smith, again: why try to produce wine in Scotland, at thirty times the expense of vineyards in sunny France?
To cut the cost, some enterprising dairy famers are creating farms that are a hundred times larger than the norm, usually sited in sunnier parts of the country, with huge winter sheds and new technology such as dry bedding, feed derived from other farm by-products, heat recycling, and capturing methane for fuel. It is no wonder that small-scale dairy farmers are complaining that they can't compete.
If we scrapped the web of subsidy that featherbeds inefficient production systems, we would produce what we needed, in the quantities we needed, at a sustainable price, and with very much greater efficiency. And taxpayers would be better off, too. Yes, some people would have to find new jobs. It happens. Ask the people who used to sell encyclopaedias.
Finally, something we can agree with Ha Joon Chang upon
That the Hitchhikers' Guide to the Galaxy is indeed a great piece of science fiction comedy and satire.
As an economist, what delighted me especially were the representations of economic theories. The story about people paying large sums of money for Antarean parakeet glands, which taste revolting, only because they are “very rich idiots who want to impress other very rich idiots” is a reworking of the 19th-century American economist Thorstein Veblen’s theory of conspicuous consumption. The wildly profitable planet-building business of Magrathea forced into hibernation for 5 million years because its own success impoverished everyone else, thus destroying its own market, is a clever way to describe the “under-consumptionist theory” that was popular in the 19th century. This theory has actually become much more relevant since Adams wrote H2G2, with the rise in inequality to shocking levels in many societies.
Veblen and under-consumptionist theory we will agree are being made fun of, used, in the comedy. But the application to our world of today, the economics we should take note of, we think should be the Golgafrincham B Ark:
MANAGEMENT CONSULTANT: Since we decided a few weeks ago to adopt leaves as legal tender, we have, of course all become immensely rich.
FORD: No really? Really?
CROWD MEMBERS: Yes, very good move…
MANAGEMENT CONSULTANT: But, we have also run into a small inflation problem on account of the high level of leaf availability. Which means that I gather the current going rate has something like three major deciduous forests buying one ship’s peanut. So, um, in order to obviate this problem and effectively revalue the leaf, we are about to embark on an extensive defoliation campaign, and um, burn down all the forests. I think that’s a sensible move don’t you?
MARKETING GIRL: That makes economic sense.
We feel this has a certain relevance for Peoples' Quantitative Easing as proposed by Jeremy Corbyn and as designed by Richard Murphy. Let's print lots of money so that the government can buy us all nice things. Nothing could possibly go wrong, it makes economic sense, doesn't it?
As to who it was on the B Ark:
CAPTAIN: Oh precisely yes. So it was decided to build three ships, three Arks in space, anyway…where’s the soap? Ah! Thank you. Ah! So the idea was that into the first ship, the A Ship, would go all the brilliant leaders…
NUMBER ONE: The scientists…
CAPTAIN: Yes, the great artists, you know, all the achievers. And then, into the third ship, the C Ship, would go all the people who did the actual work; who made things and did things you see. And then in the B Ship -
NUMBER ONE: That’s us.
CAPTAIN: Yes. Would go everyone else, the middlemen you see. And so we were sent off first.
Yes, a certain relevance for a monetary and fiscal system devised by a retired accountant from Wandsworth. We're not absolutely certain quite why it's relevant but we're really pretty sure that it is.
Farmers and the milk price: this is how markets are supposed to work
We've another of those pieces complaining about the fact that dairy farmers cannot make money producing milk these days:
As I write this, the future of our dairy farm is bleak. It must be a crazy concept to keep borrowing money to produce something that almost all of us use and which is, somewhere along the line, making money for somebody. But farmers’ lives and homes are so entwined with the production of food that they continue doing it when most serious business people would have thrown the towel in. As a result, they are exploited. How long will it continue?
What is being missed is that this is exactly how markets are supposed to work. There is, as there has been for some time, a surplus of milk production around the world. More people are willing to produce it at current prices than are willing to consume it (or perhaps, volumes produced and consumed) at this current price. Thus some of the people who are currently producing it at this price should stop doing so. And that farmers cannot make money at this price is the incentive, the impetus, for some to stop doing so.
Making a loss really is the market's method of telling you to go do something else with your life and capital. This is true whether you produce milk, wheat, jet engines or buggy whips.
As to who benefits from these current low prices obviously that's the consumer. And given that the aim of having an economy at all is so that the consumer is able to satisfy as many wants an desires as possible given the scarcity of the factors of production this is just fine. In fact, more than just fine, this is the point of the exercise.
Milk can be sold for less than the cost of production? Then stop producing milk then.
The case for abolishing Inheritance Tax
Posthumous taxation is no different to Victorian style grave robbery, only done on a much larger scale. Morally- the inheritance tax should be abolished. As well as the moralistic argument, there are also serious economic consequences of the tax- chiefly that it makes the tax system incredibly complicated. Abolishing the tax also means that those who are about to die will have the security of knowing their loved ones will have enough to live comfortably- a worry most parents have in common.
Some say this will lead to more inequality of opportunity. However this may not necessarily be the case. Take the case of the Walton family. Sam Walton grew up very poor. Through innovation and enterprise he founded Walmart and grew it to be the biggest retailer in the world, and when he died in 1992 Walmart was worth roughly $45 billion. His six children have no such experience in building a business. They are better at spending money than making it, and so their fortune will decline over the generations even without inheritance tax. This happens across the economy in Britain and the U.S. Of all the Fortune 500 companies that existed in 1955, only 11% remain. The average life expectancy for a Fortune 500 firm is now 15 years old. Family owned firms are usually sold by a less competent individual family member to another firm or individual, one with a better talent for enterprise.
So, without inheritance tax, the market still distributes resources to ensure maximum efficiency. The inequality of outcome cannot be attributed to lack of opportunity, but to inequality in entrepreneurship, something which builds capitalist society. Additionally some wealthy individuals like Bill Gates, choose to give away their wealth voluntary on their death, Gates choosing to leave his three children with just $10 million each of his vast fortune so they can “find their own way”. Taxing this fortune would probably result in less social good than would result from it going to the charities of Bill Gate’s choice, given how efficient government is.
Of course some hereditary inequality will occur, but this is the case when parents hand down good parenting skills, or good genetics or good education. Why should hereditary property be regulated by the government? Inheritance tax is unfair, predatory and economically harmful. The UK economy would benefit from Inheritance tax being scrapped.
Theo Cox Dodgson is winner of the Under-18 category of the ASI's 'Young Writer on Liberty' competition. You can follow him @theoretical23.
There is no right time to sell the RBS shares
This is a simple point, but it’s one that some people who should know better seem to keep getting wrong. Share price movements are unpredictable and there is no more reason to think the price of shares will be higher next year than to think that they’ll be lower. Which means that there is no ‘right time’ for the government to sell its RBS shares. If we thought that RBS shares would each be worth 50p more by Christmas then we’d be buying them now and bidding up the price towards 50p now. The price wouldn't quite reach 50p because there's still the chance that we're wrong.
And indeed that is exactly what happens, and why we can only assume that share prices reflect what we expect them to be worth in the future. Because share prices can go down as well as up, we get a return from investing in the stock market above what we get if we invest in safer assets, like government bonds.
You would think this was obvious, but the BBC quotes:
Ian Gordon, a banking analyst at Investec, told the BBC's Today programme: "The taxpayer is being short-changed." The shares could have been sold for a higher price in February, when they were changing hands for more than 400p, he said.
But of course we had no idea in February that they would fall, and we have no idea what will happen to them next. Like the Royal Mail shares they might rise after we sell them off, or they might fall. Or they might not move at all.
BusinessInsider’s Mike Bird makes this point very well, and as well as reminding us that the RBS bailout was always going to be a money-loser, he points the people who think we can just wait and hold on to the shares until they rise back up to their 2008 level to this chart showing RBS's share price since 2007:
To be fair, quite a lot of RBS has been spun off so it’s a much smaller company than it was in 2008 anyway, but the point still stands that there is no rising trend that we should be riding, as many people seem to think.
The flipside of all this is that Gordon Brown is equally blameless for selling off the government's gold at ‘historically low levels’, except to the extent that we might want the government to own gold for other reasons.
So there is no ‘right time to sell’ except to the extent that we do or do not want the government to own shares in the banks, or to try to make money by taking risks. If we don’t want the government playing the stock market, the ‘right time to sell’ is always now.
Securitising Britain’s Future: A free market solution to university funding
When the Coalition Government increased tuition fees from £3,300 to £9,000 a year, it had done so to provide a sustainable alternative that would boost university’s incomes and cut government spending. But there are reasons to believe this has failed. The Guardian reported that the new funding system is likely to cost the government not less, but more money than the system it replaced. It is time to reevaluate university funding, and I propose the following alternative: a system under which students would agree to ‘sell’ a percentage of their future income to their university in exchange for an education.
Under the current system moral hazard occurs since the universities need not worry about its students’ ability to repay their loans. Instead, the government will bear the costs if students default. This is a problem in desperate need of addressing especially considering that an estimated 73% of graduates will not be able to fully repay their loans.
Under the proposed system in which universities own the income rights to students’ future earnings, the incentive structure would be changed as to align the interests of students, universities and society alike. Universities will factor in how much their education will benefit their students in terms of their future earnings. This allows relative prices to convey how much certain professions are, in fact, valued by society. The university would encourage more students to take up careers that are more valued and it could charge less (in terms of percentage points) for the degrees with better prospects than those with worse.
By contrast, universities today charge uniform rates and have an incentive to provide the most appealing courses - which often mean courses that are enjoyable or easy - rather than being actually useful or valuable. The graduates may therefore lack the skills to be productive members of the workforce, despite accumulating large debts. Universities even have an incentive to admit students it knows will not benefit from the course since it will nonetheless receive government funding.
In turn, universities could sell its future income rights through a process of ‘securitisation’, per course or as a diversified portfolio. This free-market solution provides an equitable opportunity to all, since students’ ability to attend university is not depended upon current wealth but future earnings; thus depended upon skill and merit, not money. This system would streamline all stakeholders’ interests and ‘securitise’ Britain’s free and prosperous future.
Tamay is the runner-up in the 18-21 category of the ASI's 'Young Writer on Liberty' competition.
The value of remittances
When it comes to doing development properly, the role of remittances in helping the poorest in other nations plays a pivotal role and yet is considered by many to be a cost to the UK economy - a resource that would otherwise have been spent in the UK, being diverted elsewhere. The efficacy of remittances is also questioned: developing countries have been receiving remittances for years, and what do they have to show for it? These are all false questions and positions.
First, the net cost of remittances to the UK is negligible. In 2013, remittances from people in the UK to people outside of it totalled $2.2bn (outflows). Inflows (remittances into the UK from people outside of the UK) totalled $1.7bn. The net impact on the UK from remittances is $510m, which represents 0.0195% of the UK’s nominal GDP in the same year. Hence, the impact of belonging to a world where remittances are possible, and belonging to one where remittances are condemned, is “negligible” by my reading.
Bearing in mind it is low-cost to us, the only other plausible objection is that it doesn’t do any good. One example of how this criticism is levelled is when it is argued that all remittances do is increase consumption amongst recipients, and is not invested in such a way as to create long-term opportunities for growth.
It’s not clear to me that this is a proper criticism. For one, increasing the amount of resource that is available to an otherwise poor family may result in more consumption, and potentially better consumption. Imagine if the consumption takes the form of food stuffs: although the immediate effect of remittances is on non-investment purposes, these can be seen as an investment in the individuals’ long-term health. And, ultimately, a world in which people eat until they are full rather than going to bed hungry is a better world to live in. But lots of other types of consumption are also effective at improving people’s quality of life - for example, if a family has more resources with which to buy more sources of light, they may be able to work longer in the day and avoid health risks associated with working in more dangerous (i.e. unlit) conditions. Even if there are no such gains, increased consumption is associated with increased welfare - which is in itself good, particularly since the welfare gain is enjoyed by people on the lower end of the income spectrum. It’s not evident a priori that spending remittances on consumption is a bad thing.
But the evidence indicates that remittances have significant supply-side effects, and aren't solely consumption-affecting. A study in Ghana found that remittances were spent in the same way as any other income - split between investment and consumption, rather than focused on consumption. In Mexico, households without healthcare insurance spend on average 10% of remittances on healthcare. Remittances substantially lower the likelihood that children in El Salvador do not enroll into school at all, or leave before the 6th grade. A study of 11 Latin American nations showed that in households with relatively low levels of schooling and healthcare, households receiving remittances had higher health outcomes and were more likely to keep their children in schools.
When it comes to poverty reduction, current studies may, in fact, overplay the impact. The study of Latin American nations argues that many research papers assume a higher impact on poverty than is really plausible, because they do not factor in the fact that the emigrant who is sending their remittances back to the home country would likely have been working had they not left. Nevertheless, even when controlling for this, they find a modest positive effect of remittances on poverty reduction.
The fact that remittances cost the UK relatively little in net terms, combined with the improvements in lifestyle metrics in recipient nations, is a convincing case for them. If we want to do good for those in need, on a global level, we must be committed to permitting remittances and avoid the rhetoric that posits them as being ‘bad’ for the UK. They enable us, as the source nation, to benefit from the skills of the migrants coming to the UK to work, whilst providing welfare and investment opportunities elsewhere. Remittances earn developing nations three times as much as they are sent in aid - rather than forcing transfers via tax, they enable workers to make their own spending decisions with their own earnings from their own labour.
Why do rich parents give birth to rich kids?
The kids and grandkids of the wealthy tend to be wealthy. Well: that's not quite true. Kids of American football players and lottery winners and those who get wealthy through luck often squander their inheritance. And while giving your kids money makes them richer, it doesn't tend to make their kids (i.e. your grandkids) richer.
This little paradox has driven researchers to wonder why wealth is persistent, if it's not purely handing down the cash. Traditionally, scholars have divided into two camps: nature and nurture.
Families stay rich because they have prudent genes that stop their ancestors from squandering their fortunes, and because they have genes that make them good at earning more money. Or families stay rich because they give their kids skills through schooling, speaking lots of words at home, having books around for them to read, pushing them into high prestige careers, and linking them up with connections.
Lots of research points in the direction of genetics, finding that genetics explains about 50% of every important human trait, while the other 50% is largely down to 'nonshared environment'—rather than 'shared environment' (i.e. family upbringing).
For example, the gold standard meta-analysis, recently published in Nature Genetics, looked at 17,804 traits over 2,784 publications studying 14,558,903 twin pairs, and found that the average genetic contribution to a trait was 49%.
This extends to complex facts about a person, like lifetime income and wealth. For example, among Swedish twins wealth was found to be about 20-40% heritable (i.e. down to genetic factors), while 20-year average income in men was about 60% heritable.
But comparing identical and non-identical twins isn't the only valid study design for dissecting the differing impacts of nurture and nature (though it is valid). You can also look at twins reared apart and you can look what happens when a child is adopted into another family—do they end up looking like their biological or adoptive parents?
We know that adoption can temporarily boost IQ but other evidence suggests this may be driven by non-randomness in the study design or peter out once the child leaves the family environment. What's more the gains might boost measured IQ but not intelligence.
But a new study suggests that adoptive parents are the main drivers of children's wealth, with biological parents unimportant by comparison. However, this new study finds that the result is not through transmitting human capital down the line or even through children earning higher income, but simply through transferring cash or learned prudence—i.e. kids investing better.
The paper (pdf), from Sandra E. Black, Paul J. Devereux, Petter Lundborg, Kaveh Majlesi, looks at a sample of 2,519 Swedish adoptees born between 1950 and 1970, and finds that the rank of a child's wealth is correlated 0.23 with their adoptive parents' wealth (and 0.65 when bequests are taken into account). By contrast it correlates only 0.12 with the rank of their biological parents. The results for levels of wealth, rather than ranks in the wealth distribution, are very similar.
So does this tell us that the rich buy private school, tutor their kids, make them learn violin, and help them with connections and so on? No! The authors rule out this possibility, and suggest only two possible options: financial gifts (which they cannot track) and learned prudence (which they provide evidence for in another paper).
(Note, the authors tell us that income is more biological than adoptive. Human capital is not being driven by upbringing. We might reasonably guess that a couple of generations down the line nature is driving wealth more than nurture.)
I work for a think tank so I think about policy conclusions and I think this fits pretty nicely with Adam Smith Institute ideas. What can you do to raise people's wealth? None of the things that pushy parents do seem to help their kids be rich except two: give them cash, and teach them to save more and save better.
The latter seems a bit more politically practicable, but the problem is that most financial education schemes seem to have no impact. Maybe the only way you can teach this stuff is something as long-lasting and comprehensive as being adopted. (I'm open to being wrong here—it would be great if there were doable financial literacy interventions that had lasting impacts.)
But we can give people cash. And funnily enough that is ASI house policy.