Was there really a Cuban Missile Crisis?

Lars Christensen, aka the market monetarist, has a great post over at his blog on whether or not the Cuban Missile Crisis should really have been so worrying. A stupid question, you might think, but he shows that the equity markets did not crash anything like as much as they would have been expected to do if a true catastrophe was likely.

What really happened, however, was that S&P500 didn’t drop – it flatlined during the 13 days in October 1962 the stand-off between the US and the Soviet Union lasted. That to me is pretty remarkable given what could have happened.

Why didn't the markets think the world was going to be destroyed—and with it the value of big companies. Why didn't investors rush to put all their money in gold, underground bunkers, canned goods and guns?

There might be a number of reasons why we didn’t see a stock market collapse during the standard-off. Some have argued that the crisis was an example of what have been called Mutual Assured Destruction (MAD). Both the US and Soviet Union knew that there would be no winners in a nuclear conflict and therefore none of them would have an incentive to actual start a nuclear war. It might be that investors realised this and while the global media was reporting on the risk of the outbreak of the third World War they were not panicking (contrary to popular believe stock markets are a lot less prone to panic than policy makers).

Another possibility is of course that the markets knew better than the Kennedy administration about the geopolitical risks prior to the crisis. Hence, the stock market had already fallen more than 20% in the months prior to Kennedy administration’s announced that the Soviet Union was putting up a nuclear missiles in Cuba.

And it's worth reminding those who are sceptical what actually happened.

And the market was of course right – there was not third World War and after 13 days of tense stand-off the crisis ended.

For more commentary, read Pete Spence at City A.M. and the rest of Lars' post.

A small linguistic note

One of the worrywart tribe has taken to the pages of The Guardian to tell us all that we have to talk about indeterminate masculine pronouns.

When I set about revising Plain Words, the guide to English usage by my great-grandfather, Ernest Gowers, I soon realised that applying the book's own principles to the job would require me to eliminate from its pages all uses of the indeterminate masculine pronoun. I was under orders to preserve the vintage charm of the original; but a writing guide must demonstrate what it is attempting to explain, and the most famous maxim in Plain Words is "be short, be simple, be human". In the 21st century, "he" used to mean "he or she" is annoying to so many people that it no longer qualifies as "human"– or charming.

I can't say that the use of "he" to mean "he or she" causes me any great anguish. But then as an ageing and privileged white guy I would say that, wouldn't I? However, I would point out that while people are whining about this the very same people are whining that we must move from gender speific job descriptions to indeterminate mascluine job descriptions. I have, for example, been seeing Scarlett Johansson being described as an actor. Which, to an ageing white guy like me seems a little unlikely given the curves she possesses. Similarly, we are urged to use police officer, or police something or other, rather than policeman or woman. The old distinction between chef and cook has gone, to be replaced with the indeterminately masculine chef as the description of one who knows how to season and cook remains as the verb.

Which leads me to my first observation, that some parts of society are schizophrenic (apologies, challenged in their mental stability) on certain matters. How can the same people be arguing that we must not use the indeterminate masculine at the same time as all job descriptions must become said indeterminate masculine?

As it happens I found out something about the Czech language last night (in the pub of course, one of the similarities with the English, and joys, of the Czech culture is that all of the interesting things happen in pubs). Which is that they have the same group of worrywarts over the use of the indeterminate masculine as we do. Except that their answer is entirely the other way around. In order to reduce, fight against, gender discrimination in language it is necessary to use fully masculine or fully feminine job descriptions. Thus Doktor and Doktorka, (leaving aside diacriticals etc), Ingenier and Igenierka, Economist and Economistka*, all the way through all job descriptions. Many of these distinctions are not in common use but the argument is that they ought to be. On the grounds that we can only fight gender discrimination by pointing out that women can indeed do any job in the economy and we should deliberately identify those who do so.

Which leads me to my second observation. This political correctness over gender in language is as with the methods of eating asparagus. It doesn't matter, in any real sense, how one eats asparagus, with knife and fork, with fingers, with catapults vaulting them into open mouths, it matters only that you understand the social class denoted by each method and approvingly sneer at all who do not use the method appropriate to your own. So it is with these worrywarts over the indeterminate masculine. Not only are they schizophrenic in our own language but that the same groups doing the worrying in other languages come to the diametrically opposed solution means that it's all just a method of identifying your tribe and doing so by what you express concern over.

In short we can continue to pay them no mind as I've been doing these past 50 years (umm, 51 by the time you read this).

*I don't claim that my Czech is good enough to have got those job descriptions correct, only that the "ka" denotes a women doing that job.

Hurrah! There are fewer poor people than we thought

Not all that many people are aware of quite how appallingly bad most economics statistics are. Not in the sense of it's terrible that the numbers are as they are, but that the numbers are generally so shoddily lashed together. And this is obviously going to be even more true in hte poorer parts of the world. A government that hasn't quite worked out how to collect the rubbish isn't going to be all that good at counting the people nor what they do or earn.

The upshot of this is that we really don't know how many poor people there are out there. We know there are fewer than there used to be, and the poor are a very much smaller portion of the growing population than used to be true, but we really only know trends rather than actual numbers. Basically because the numbers we've got for things like GDP and inequality are so sketchy themselves.

So, enter another method of trying to measure things. What's one of the first things someone will do when they've finally got a couple of annas to rub together? Get in an electric light bulb, So, let us measure the amount of light that we can see from space and we can have a good stab at working out whither poverty. Which is exactly what this paper does:

Finally, we use the new optimal measure of true income to calculate the evolution of poverty at the worldwide level as well as at the regional level. Given that our optimal measure gives a small weight to survey means, our optimal estimates of poverty rates tend to be closer to those reported in the research that uses GDP as the anchor. Under our procedure, developing world poverty declines from 11.8% in 1992 to 6.1% in 2005 and 4.5% in 2010, much lower than the path constructed by giving a weight of 1 to the surveys, which entails poverty falling from 42% to 20.5% between 1992 and 2010. We run a battery of robustness checks on our findings; under the ones most favourable to replicating the survey-based results, the largest that we find developing world poverty to be in 2010 is 12%.

Excellent, things are better than we thought they were.

It's worth making on other point about the differences in these methods of measurement. There are those who insist that those developing economies need to be planned. The smack of firm government must guide their economy. But as we can see, the governments don't actually have the information they would need to be able to plan, even if this were desirable. So it's a doubly bad idea.

Ukraine and the all-or-nothing EU

The trouble with EU membership is that it is such a big deal. A country that wants to be part of the club, and enjoy its free trade benefits also has to accept a mountain of regulation and to sign up for the common currency. It is all or nothing.

That puts countries like Ukraine in a fix, just as it put the UK in a bit of a fix in the early 1970s. The UK did not want to raise tariff barriers and lose its trading relationships with its historic trading partners such as Canada, Australia and New Zealand, from which it imported a great many agricultural products – butter, lamb, fruit, bacon and much else. But thanks to the Common Agricultural Policy, it did not have much choice. Today, the UK is inside the EU's tariff wall, which makes trade with the rest of the world more expensive, and naturally focuses UK trade on Europe.

Ukraine would undoubtedly gain from closer trading links with the EU, but the all-or-nothing nature of the deal would mean that the country's links to Russia and other non-EU countries would suffer, just as the UK's Commonwealth links did. And that, of course, is seen as a threat by Ukraine's large Russian-speaking population. And – never mind the political and defence implications, given the EU's close links with NATO – Russia does not want to see its trade with Ukraine cut back, any more than New Zealand did ours. So they see the future direction of Ukraine as a high-stakes game.

As a logical matter, that does not have to be. If the EU allowed Ukraine the same sort of status enjoyed by (neutral) Switzerland, the country would be free to trade with the EU as part of its customs-union club – but would remain free to preserve trading links to other countries as well. It would also be free to retain its currency and its legal and regulatory structure. A free trade pact with the EU that would help grow the Ukrainian economy, without threatening Russia or the Russian-speaking Ukrainians that the country would be wholly swallowed up into a Western political alliance.

Sadly, though it might talk about creating 'closer trading links' with Ukraine, the EU will never offer the country such a free-trade-but-no-politics status. If they did, every EU applicant would be demanding it right away – along with quite the UK and a few other EU Member States who hate all the regulation, currency union and horse-trading.

Which means that as a practical matter, the stakes will remain dangerously high in Ukraine, whatever happens. What a pity we cannot just have free trade without the politics.

Let me Google that for you

Google is being targeted by protesters angry about the rapid increase in the cost of living in San Francisco. Their complaint focuses on Google's employee shuttle buses using municipal bus stops, but the real problem seems to be that well-paid Silicon Valley workers have driven rents up in the city. In City AM I argue that this is much more likely to be to do with planning controls restricting the supply of housing, and that government is to blame:

It comes down to supply and demand. As the Cato Institute’s David Boaz has noted, San Francisco’s strict planning laws have made it much more costly to build new housing to meet rising demand. Zoning laws restrict the construction of higher density buildings on the city’s limited land mass. Median rents are now the highest in the US. Over the past ten years, the city’s population has risen by 75,000, yet the number of housing units has increased by just 17,000. Paradoxically, rent controls that apply to some parts of the city are probably making things worse – those who live in rent-controlled housing may be OK, but there is no incentive to build more.

The parallels with London are obvious. Read the whole thing.

Bill Easterly on Bill Gates and aid and development

Bill and Melinda Gates have released their annual letter on what's going on with their Foundation, global poverty and aid. And they quite rightly point out that things are indeed getting better.

However, this is not the same thing as stating that it is aid that is making things better. As Bill Easterly points out:

The obsession with international aid is a rich-world vanity that exaggerates the importance of western elites. It is comforting to imagine that benevolent leaders advised by wise experts could make the poor world rich. But this is a condescending fantasy. The progress that Mr Gates celebrates is the work of entrepreneurs, inventors, traders, investors, activists – not to mention ordinary people of commitment and ingenuity striving for a better life. Davos Man may not be ready to acknowledge that he does not hold the fate of humanity in his gilded hands. But that need not stop the rest of us.

There are undoubted successes stemming from aid budgets: vaccination programs or the spread of oral rehydration therapy for example. These have certainly been funded by aid: but we should also note that our own societies managed very much the same things without aid from abroad to pay for them. So while aid may indeed have paid for them that's not the same as stating that aid is necessary for them to have happened.

But Easterly's larger point is that aid flows are of such tiny amounts in comparison with the global economy that they cannot in fact explain that marvellous reduction in poverty. Over the decades there's been very little aid to places such as China, Taiwan, S. Korea, the places where the battle against poverty is being so conclusively won for example. What has actually worked is that these places have become part of the global economy rather than languishing in purist localism.

Or, as we like to say here at the ASI, I contribute to making poor people richer by buying things made by poor people in poor countries.

Aid's all very well but trade is the name of the game.

Immigration controls are the new Corn Laws. Why don't more free marketeers care?

If you had to name a single government policy that ruins the greatest number of lives, what would you pick? The 45p tax rate? Saver-hurting inflation? Green energy subsidies?

I’d say that the biggest one is the one that free marketeers are largely silent about: migration controls.

In 2011 Michael Clemens looked at the economic estimates of the global GDP growth that would come if every country in the world abolished restrictions on the movement of goods, capital and labour across national borders. According to the papers Clemens looked at, removing all barriers to trade would increase global GDP by between 0.3% and 4.1%; removing all barriers to capital flows by between 0.1% and 1.7%. Those are big gains that would make the world a substantially richer place.

Completely removing barriers to migration, though, could increase global GDP by between 67% and 147.3%. Think about that: simply letting anyone work anywhere could more than double global GDP. And that would be a long-term boost to economic growth, not a one-off. Even the bottom end of that, 67%, is an astonishingly huge figure.

It’s not as far-fetched as it might sound. As Clemens points out, workers can often create wildly different amounts of value by doing the same thing in different places (or doing them with different people). A taxi driver who might expect to make $1,500/year in a city in (say) Benin might be able to make $31,000/year in New York City by doing exactly the same thing. That shouldn’t be a surprise: bringing someone like Sergey Brin to work quickly, saving him an hour, is much more valuable in terms of his opportunity cost than, say, saving me an hour.

The institutions that most successful countries have are extremely valuable too. Corruption, instability and political uncertainty all have the potential to be extremely costly for firms, and they often prefer to pay a higher up-front cost in labour terms to locate their production in stable countries with good institutions. That’s one reason why Nissan still prefers to build some cars in Sunderland than Haiti: the institutions effectively boost Sunderlanders' productivity enough to make their higher wages worth paying. If we let Haitians move to Sunderland, they could take advantage of those institutions and make a living for themselves too.

The counterargument will be that a Sunderland filled with Haitians will quickly stop being like Sunderland: Haitians might vote badly, or might be so culturally incompatible that the social institutions that are so important to Sunderland's success, like trust, would break down and ruin things for everyone. That’s a valid argument and probably the main thing we should be talking about when we talk about immigration. But it’s also ambiguous: immigrants tend to have lower rates of crime than natives, and increased contact between immigrants and their neighbours can mostly overcome the cohesion problem.

But even if these arguments did prove to be true, they would be a case for country-specific immigration controls: even if Haitians proved to be too culturally incompatible to come to Britain en masse without undermining what’s valuable about Britain, that would not necessarily be the case for Chinese or Sri Lankans. If this seems ugly it is much, much less ugly than our existing blanket controls on immigration. Letting more people come to Britain should be the priority, not preserving the appearance of cultural neutrality.

What puzzles me is that my fellow free marketeers are often very indifferent (if not openly hostile) to policies that make it easier for foreign people to work in Britain. They cannot believe the economic claims that immigrants 'steal jobs' in an overall harmful way unless they also think that free trade does. There are many keyhole solutions to prevent immigrants from sponging off the welfare state. The cultural arguments, if they can be classed as such, are worth considering but certainly not so powerful that they invalidate the economic arguments. And free marketeers are usually pretty happy to let society adjust itself rather than try to engineer it to become or remain the way they like it.

Fundamentally, migration controls are not just laws about what foreign people can do, they’re laws prohibiting businesses from hiring people and property owners renting or selling to people who were unlucky enough to have been born in the wrong place. On the fact of it, these laws are so staggeringly invasive that no free marketeer could be comfortable with them; when you realise the economic costs it is amazing that anyone can tolerate them at all.

There are lots and lots of bad things governments do that ruin people’s lives. But few cause as much harm to the poorest people as the state controls of where people can work and live that we call ‘migration policy’. Even a marginal step towards a more liberal immigration policy would allow people to create an enormous amount of wealth, and probably do more good than almost any other possible policy. So why don’t more free marketeers start talking about it?

So who really benefits from this neoliberal globalism stuff anyway?

This chart comes from this excellent paper by Cristoph Lakner and Branko Milanovic. It shows whose incomes have risen the most (and fallen the most) as a result of this neoliberal globalisation thing we've been having for the past 30 years. The results from the ex-Soviet bloc need to be taken with a real pinch of salt unfortunately, for they use starting figures that most observers consider to be far too high. It's really a stretch to say that Romania today is a poorer place than it was in the dying days of the Ceascescu regime.

However, look over to those who have benefitted.  We'd not be all that surprised to see that many of the Chinese deciles have seen their incomes rise. The growth of China is after all the major economic story of these past decades. But look at that UK bottom decile: 5.5% per annum growth in incomes! That rather gives the lie to the idea that the poor are getting poorer, doesn't it? Ireland's Celtic Tiger growth (note that these figures are up until 2008) similarly seems to have beneftted the two bottom deciles in that country.

The net effect of this neoliberal globalisation thing seems to be that the poor are getting rich. And given that that's what we all want to happen then why is it that so many people complain about it all?

No, Britain isn't a developing country

Britain is a developing country, says Aditya Chakrabortty. He bases this largely on the fact that it is below some poor countries on a number of international rankings. (Never has an article owed so much to Wikipedia’s “List of countries by” pages.) Some of the rankings seem obscure: is Barbados's superior ‘ground transport’ system worth caring about? Does Mali beating the UK in terms of business investment tell us anything? Others rely on the reader not knowing much about the country Britain does worse than: the UK may have a worse road network than Chile, but Chile's Public-Private Partnership roads have made it a regional leader in infrastructure.

One thing that Chakrabortty is particularly concerned about is graphene, a super-strong substance first isolated in 2004 and pioneered by scientists at the University of Manchester. What worries Chakrabortty is that South Korean firms are bringing graphene to market much more quickly than British firms. This, he says, is emblematic of “a familiar pattern of generating innovations for the rest of the world to capitalise on”.

I guess that’s supposed to be a bad thing, but it doesn’t sound like it to me. It’s good when inventions spread beyond their birthplace: to use Matt Ridley’s metaphor, the ideas ‘have sex’ and mutate more quickly. Overall, the world – and Britain, if for some reason that’s all you care about – has done well from Tim Berners-Lee’s world wide web being capitalised on by non-Britons in Silicon Valley. Germans are better off that Japanese firms make cars as well as Volkswagen, and Finns are better off that Californians tried to make mobile phones better too.

Chakrabortty might object that he doesn't mind South Koreans doing well with graphene, he just wishes Britons were too. But why graphene in particular? Chakrabortty’s counterpart in Seoul could write an identical piece worrying about South Korea’s relative weakness in finance, tourism, the cultural arts, or telecommunications. When firms in different countries specialise in different areas it is pointless to look at any single product or sector to judge which country is healthy.

There’s not much point in comparing the growth of rich and poor countries – poor countries are playing ‘catch up’ and can grow quickly by applying innovations already developed elsewhere. But if Britons should be worried about something, it’s the UK’s centralised public sector, which, lacking the profit motive as a crucible for new ideas, is less innovative than international equivalents. For instance, the British health system essentially free rides on innovations in America.

Chakrabortty asks “How can any nation that came up with the BBC and the NHS be considered in the same breath as India or China?”. Good question.

Post-mortem on migration debate

Last night I went to Bristol Freedom Society to debate Ryan Bourne, of the Centre for Policy Studies, over whether the UK should have open borders. It was very enjoyable, and while I won very marginally, convincing one person to switch sides from closed to open borders, I thought it was extremely close, and Ryan was certainly a very fluent and convincing speaker.

My main case was (a) restricting migration restricts extremely important rights, like the freedom to take a job you are offered and the freedom to offer a job to a desired applicant, (b) when we curtail these sorts of freedoms we need to have a preponderance of evidence that the costs are very high, (c) the economic evidence says immigration is pretty good for the recipient country, very good for the source country, and amazingly good for the migrant themselves, (d) the magnitude of the social/cultural impact (i.e. the effect of migrants on our institutions, customs, etc.) is unclear, (e) therefore, we ought to have open borders (or something very close to open borders).

Ryan's counterargument centred on the claim that the benefits of restricted migration would not extend if it was unrestricted or close to unrestricted, because migration of certain amounts undermines the institutions that cause migration to benefit people at all. (It was more complex, but this formed the nub of the debate). As is suggested by my point (d), I think there is some plausibility to this argument, but I also think it is under-studied. I suggested this when we were able to discuss the points we'd made in our opening statements a bit more, and we had a lot of back-and-forth over the issue, but we didn't resolve our disagreement. Without trying to guess at Ryan's position or put words in his mouth, I will stake out three claims I think we must accept to have the debate within a rational framework.

1. All positions are on a continuum from complete open borders (as much gross immigration as non-natives wish/can afford) to complete closed borders (no gross immigration). Perhaps the best way of accurately describing positions is by how much migration they favour. Open borders advocates favour something close to 100% of the amount that would occur under open borders. Everyone else is somewhere on a spectrum from no gross migration to the 100% open borders case (past societies have also had forced immigration, i.e. slavery, so these aren't the only theoretical positions, just the only persuasive ones.)

2. The supposed socio-cultural problems of migration come from particular numbers of migrants. No one thinks 5,000 migrants a year to a country the size of the UK will fundamentally undermine its customs, laws, institutions and so on. Many people think 5,000,000 migrants per year would. So to be anti-open borders you implicitly have to have an estimate of how much migration you think is going to occur. If open borders only led to 5,000 migrants per year, then almost no one would be against it. It is because open borders would be expected to lead to too much migration that people oppose it. This doesn't change if it's a question of probability distribution—then migration is opposed because it raises the chances of too much migration occuring to too high a level. Everyone must (at least implicitly) have an expected level of migration to oppose open borders.

3. Any claim that migration should be kept to a particular level, because of the risk of undermining British institutions, implies an assumption about how much damage the marginal immigrant does or will do (reliably or with some probability). One cannot cop out of the question, you need to have an answer. But no one has yet set out good evidence about exactly how much damage to institutions the marginal immigrant does or will do—typically arguments in this area depend on anecdote or things that people feel they "just know". This won't do when the benefits to immigration are so high. We cannot simply assume the cost to our institutions outweighs the other benefits.

I think once these three points have been accepted, there is a lot of room for good empirical work. But until they have, a lot of the migration debate will be unclear, vague, and people will be talking past one another.