Will Hutton's very strange thoughts on climate change
Apparently we free marketeers are almost entirely responsible for the fact that Flipper is going to boil in the coming end of times. It's all our fault that not enough is being done about climate change.
However, it will be met by a barrage of criticism from the new "sceptical" environmental movement – almost entirely on the political right – which, while conceding that global temperatures are rising, insists that there is still insufficient scientific proof to make alarmist predictions. There is certainly no need for governments to tax and regulate the burning of fossil fuels, or subsidise renewables, or come to "freedom-denying" international agreements. Economic growth, technology and the magic of human adaptation through tried and tested market mechanisms will see civilisation through what is already an over-hyped crisis.
With one slight proviso that is indeed what we argue. It's happening but it's unlkiely to be catastrophic. Economic growth and technology will indeed be the way out of it. And market mechanisms are going to be vitally important in ensuring this happens.
But this does not put us out on some extremist wing of the argumentation: the reason we support such things is because they are the scientific consensus on what to do about climate change.
The markets, economic growth and technology thing comes from the Special Report on Emissions Scenarios, the foundational economics study upon which the entirety of the IPCC process is built. It's very clear indeed that the globalised scenarios are better than the not globalised (lower population, a richer population and lower emissions). Further, it's equally obvious that a free market/capitalist society produces a better outcome (lower population, a richer population and lower emissions).
The one proviso is that we (or at least I) do agree with taxation of carbon emissions. They are an externality, externalities should have Pigou taxes applied to htem. We even have a very large report called the Stern Review that is supposed to guide our actions in this matter. And that Stern Review says apply a carbon tax of $80 per tonne CO2-e. Which is largely what we already do here in the UK.
Free market globalised capitalism with a carbon tax. That's what this "political rightist" thinks should happen. And the amazing thing is that this particular solution is boringly mainstream, it's actually the considered scientific consensus.
Perhaps government regulation isn't the way to go then
That something must be done is sometimes true: that that thing must be done by government regulation might also be true at times. But I have a very strong feeling that the majority of times when something must be done doing it by any method other than government regulation would be a good idea. Just three examples from around the place just recently.
Auto-enrollment in the new compulsory pension schemes that the UK government is just introducing. Reports are that this is going to cost firms £15 billion just to fill out the paperwork. Money that, call me misguided if you wish, would probably have been better spent on being put into pension funds for those workers.
The Dodd Frank regulations on conflict minerals. Stopping slave labour at mines in The Congo is a good idea: we were originally told by the Enough Project that the checking system, to make sure no minerals from those mines entered the supply chain, would cost some $10 million a year. The SEC now estimates the cost of doing the paperwork at $4 billion.
The FATCA regulations to stop Americans hiding money abroad, away from the prying eyes of the Internal Revenue Service. This is expected to bring in a few billions a year in additional tax revenues. One estimate I've seen of the cost of compliance with these rules is $1 trillion.
The one thing that is common to all of these cases is that the bureaucracy set up to adminster each scheme has not had to consider the costs to other people of said schemes. That cost of bureaucratic regulation is, if you like, an externality to the legislative system. And as we all know from our studies of climate change externalities must be controlled. The polluter must pay i the most common catchphrase here.
So, to repeat a suggestion I've made before. We need to change the system so that those externalities are internalised, are made part of the legislative and decision making process. The most obvious method of doing so is that we get to charge the government for the time they make us spend on paperwork. They want us to fill out a complicated form? Great, that'll be £75 an hour (a reasonable semi-professional rate that) for the time it takes me to fill out said form.
That'll stop the little buggers in their tracks.....
Why are insurers willing to make permanent losses on insuring people?
Following on from my blog post of yesterday I've been emailed with an interesting question. I asserted that the very evidence that banks are making losses on current accounts (before we consider the value of the float that is) is evidence that the banking market for current accounts was competitive. I was then asked this follow up question:
"Tim, you say that banks consistently lose money and/or fail to make a decent return, thus perfectly competive. I’ve no reason to doubt you. A query for those who understand these things. Why do some markets consistently lose money for those trying but failing to be ruthless capitalists? Motor insurance is a consistent loser overall, even though there is a captive market. But no one drops out. Professional indemnity insurance for solicitors is another consistent loser, despite a captive market. Whenever someone drops out, some obscure Latvian/Irish insurer comes in, keeping the rates down. Newspapers are another, but they are fun/prestigious/influential. Motor insurance is not. What is it about certain markets that makes capitalists tolerate endless losses?"
The newspaper point is fun: there are those willing to take financial losses for the proximity to power and sheer self importance of being a media magnate. Which leads to the thought that those who tell us of the financial sacrifices they make to be in "public service" might have similar motivations.
The answer to the insurance question though is simple: premiums are not the only revenue stream in an insurance company.
We pay our premiums in and the insurance company only has to pay them out at some point in the future. They thus get to play with that vast pile of cash for some amount of time. What they actually do with it is invest it. What they invest in will depend a little on what type of insurance they're writing, what the likely time scale is before any potential payout. Someone writing car insurance will probably have a more liquid investment (ie, shorter term) portfolio than someone writing earthquake reinsurance (ie, insurance to insurance companies about earthquakes). The reinsurance companies have some of the longest term investment portfolios around, often longer even than pension providers.
These investments of course make a return (well, hopefully they do!). And that's the second source of insurance company income. The returns they get on the money they get to play with inbetween receiving the premiums and having to pay out the losses.
The end result of this in a competitive market is that said insurance companies are going to compete among themselves over the price they will set those premiums at. Given that second income stream it actually makes sense for them to lose money on the underwriting, a loss which is more than compensated for by the investment returns. Indeed, we can take this one step further. Given that income stream from investment returns we have a very simple test for whether an insurance market is in fact competitive or not. If the companies are all making a profit on the simple underwriting then probably not. By this measure the UK car insurance market probably is competitive, the US one not.
There are other points we can make as well. When investment returns fall then we might expect to see insurance prices rise. I don't know whether that has happened recently and if anyone knows do please tell me. Other businesses work in much the same manner. Futures broking say. The actual business of doing the buying and selling is a loss leader for gaining access to the deposits that the customers must leave with the firm (the "margin"). This is invested for the benefit of the firm, not the customer. It was indeed falling returns on bonds and bills (the allowable investments for these firms) that led MF Global to stretch itself into the Euro Sovereign market in search of higher yield. An adventure that ended horribly of course.
Another observation is that the part of Obamacare that insists that medical insurance companies pay out 80% of premiums on actual medical care doesn't matter very much. For no one's bothered to take account of the investment returns from having all that cash while they wait for people to get cancer.
And finally, this is the secret of Warren Buffett's wealth. Yes, he is indeed a very astute investor. But as soon as he'd scraped together enough money to do so the first thing he bought was an insurance company. So his excellence in investing has not been applied to his own money (nor those of his partners) over the decades, but to the multiples of their capital that owning that cash float and investment pool inside an insurance company offers him. He's been using leverage: not by borrowing but by owning the returns from the insurance company premium pile. Oh, and Geico, which Berkshire Hathaway owns, generally does make a profit on car insurance underwriting. But then I've already said that the US car insurance market might not be all that competitive.
Rolling down a slippery slope
Warnings about ‘slippery slopes’ are often overused by defenders of individual liberty. That’s probably inevitable, since we often end up defending a principle against a seemingly-pragmatic policy that, by itself, is not very objectionable.
For instance, I find it hard to muster any specific argument against energy efficiency labelling of washing machines, but the principle of letting people do what they want with their own stuff means that I’m still pretty suspicious of them. It’s hard to convince someone else who doesn’t already share my belief in that principle without resorting to things like slippery slope arguments .(First they label the washing machines – next it’ll be health warnings on cans of Coca-Cola!)
But, overused as they can be, slippery slopes really do exist. Tobacco regulation is an interesting example, because it's often used as the thin end of the wedge for other kinds of paternalism. After plain packaging of tobacco was passed in Australia (will the new, nominally Liberal government repeal this legislation?), its advocates moved straight on to calls for plain packaging of alcohol. To quote our 2012 paper:
Australian Senator Cory Bernadi recalls: “[O]n the very first day [after the plain packaging legislation was passed] they moved onto drinking. People who were advocating plain packaging were saying “We should have this for alcohol. We should have it in fast food”. Where does it end? The nanny state will never end because there is always another cause to advocate for.”
Some health groups in Australia have also called for plain packaging of ‘junk food’, whatever that is.
So it’s worrying when tobacco is treated as a special case in international trade agreements, as is happening in Trans-Pacific Partnership negotiations between a number of major Pacific Rim countries, including Australia, the US, New Zealand and Japan.
The US and Malaysia have proposed exemptions for domestic tobacco control measures from the provisions of the Partnership. Not many people will object to that on its own, but here’s where the slippery slope problem comes in. Most free trade agreements are riddled with special exceptions, but using them to reinforce domestic paternalism is particularly ugly.
A free trade agreement that institutionalises tobacco as being ‘non-normal’ is a hop, skip and a jump from one that does the same for all sorts of other things that people probably would have a problem with being told are abnormal, like booze. And the infantilization of adults – much harder to pinpoint than the number of lives supposedly ‘saved’ by tobacco control measures – rolls on.
What an interesting example from Zoe Williams
If this were true it would most certainly be undesirable:
We spend so much time talking about this titanic clash between the free market and the social state – yet ignore the fact that most of our major "markets" no longer operate as such. This is an oligarchy whose only governing authority is the administrator of wrist-slaps, and whose principles begin and end with the preservation of its jointly and severally managed profit. Which is to say that they're not competing against each other; they collaborate brilliantly – which would be sweet to watch were it not for the fact that they are working together the better to screw us.
Monopolies and oiligopolies are indeed undesirable things. And we here at the ASI spend much of our time pointing this out and arguing for the one known solution to the problem, more markets, more free markets. But what really surprises is the example that Ms. Williams uses to bolster her case:
Looking specifically at PPI, we could also see the counter-intuitive but obvious point that banks aren't charging enough for their services: current accounts cost money to administer. But rather than admit this, they would prefer to outwardly compete with one another, vie to see who can be the most free, while recouping the money by sleight of hand (swingeing overdraft charges), irresponsible lending or outright cheating (mis-sold PPI). This is what a market with only four or five big players looks like: amazing value in the top line, all the profit draining from somewhere you can't see.
In a truly competitive market we expect profits to decline to something around zero. In the long term perhaps to the level that just covers the cost of capital: something the UK commercial banks do not manage. In the proper economic sense they are therefore losing money: just the result we expect from that truly competitive market.
So, in the provision of current accounts we have evidence that we do indeed have that desired competitive market. Yet this is being taken as evidence of oligopoly? What is it they're putting in the water over there in York Way?
The new economics foundation hasn't bothered to understand Adam Smith
You would think that 237 years after publication that those who wish to pronounce on matters economic would have, by now, grasped the simple and basic points that were made by Adam Smith in Wealth of Nations. But apparently not, at least not over at the nef, which is why Giles Wilkes explanation of the acronym, not economics, frankly, is so apposite.
They've a new book out telling us how lovely it would be if we all just worked less and had more leisure. In this they are correct: it would indeed be wondrous if we were able to take more of our increasing wealth as leisure. Which is, of course, what we have been doing for some centuries now as our wealth has increased. We all have a great deal more leisure time than our forefathers (and most especially foremothers), as I've pointed out here and elsewhere many a time.
However, where the wheels come off the organic yurt is that they think that we will increase leisure hours by doing less work in the market and more for ourselves in domestic production. This is, quite frankly, an insane suggestion.
Take two of Adam's points. The first that the sole purpose of all production is consumption. The corollary of this is that we would like production to be efficient: this will maximise potential consumption for any given set of inputs. The second that the division and specialisation of labour increases the efficiency of production. Thus, if we wish to increase the amount that can be consumed for the inputs available then therefore we want to take advantage of the specialisation and division of labour.
The specialisation and division of labour takes place through the market: sadly it's not true that all 7 billion extant human beings are part of this yet (this is why some of them are so darn poor) but a good three to four billion are. That's the number that we can divide and specialise with. This is going to, does lead to, vastly greater efficiency of production than the available split between the two people in my household. Thus by doing more market work and less household production I will maximise the amount of leisure I have for any particular standard of living. Or, if I wish to run it the other way (as we all do at times, some of us do all the time) maximise the standard of living for the number of hours I am prepared to labour and not be at leisure.
The entire thrust of the nef's new little book is that we should, in complete contradiction to the above description of reality, do less market work where we are efficient and more household work where we are less so. So that we must labour more hours for any particular standard of living or, alternatively, have a lower standard of living for any particular amount of leisure we might decide to have.
In one chapter we have a full blown professor no less arguing the following:
Tim Jackson challenges the argument that more labour productivity inevitably leads to more growth and more jobs.
No one has ever said it does: rather, that greater labour productivity allows more leisure for that labour that is being more productive: or, alternatively, a higher standard of living for said labour.
These people a loons.
Mean medians
The US Census Bureau has just released a major publication "Income, Poverty and Health Insurance Coverage in the United States: 2012" that has set much of the US political and economic blogosphere alight. "The incomes of the middle class have stagnated!" they cry, pointing to a statistic that shows the median household income in 2012 down from a real terms peak of $56,080 in 1999 to its pre-recession peak of $55,628 in 2007, to a measly $51,017 last year. That means the median has grown just 3% since 1991, when the last major recession hit the bottom. On the headline measure, incomes are actually below 1989.
I do not doubt that the middle classes (and the poor!) have been hit hard by the recession (although in the UK the story might not work in exactly the same way). But to tell this as a general story of middle-class decline seems to be stretching it massively. I don't just mean because we can now use excellent services like Facebook, Twitter, Google, and so on for free. Having said that, I think Tyler Cowen massively undercounts the importance of free internet services—we now have near-instant, cheap or free access to basically the entirety of human artistic output. A proper measure of consumption or income that included these would give a much more optimistic result.
Still, this isn't my key point. We use median statistics because incomes are very unequally distributed—the US had a Gini coefficient of 0.463 in 2012, while the UK's was 0.32 in 2011-12. A mean (like GDP/capita) does not tell us anything about how gains are distributed, it just tells us how big the gains have been, compared to the size of the population. A median, showing us the middle point, is less easily skewed. But a median can still be extremely misleading under certain circumstances.
One of those circumstances, and an empirically highly relevant one, is when there is mass immigration to a country. According to one official dataset and my simple calculations, legal inward migration to the US was 13m between the 1999 peak and 2011 (inclusive). Presumably illegal migrants aren't counted in the figures, but for completeness we might note they seem to number more than 12m. If we assume that inward migration is typically lower skilled than the US population as a whole (which seems highly plausible), then it's entirely possible that a median falls while every individual in the population becomes much richer. Indeed, this is particularly true if outward migration is largely made of particularly high-skilled people (which also seems plausible). The income per natural concept, developed for a different reason, but relevant, is the number we'd want to check to look at the real trends in incomes when the make-up of the population is changing significantly.
Immigrants to the USA have much higher incomes than they had before. US citizens' incomes also rise, not just because migration boosts their wages but also because of the general effects of economic growth—GDP/capita is significantly up on 1989, 1991 or any of dates picked to generate shocking income statistics. Everyone is better off, but the statistics need not reflect that. Of course, since I haven't picked the statistics apart absolutely conclusively, I can't say for sure that this effect is actually driving the divergence between apparent prosperity for US middle classes and the statistics implying penury. But of course, without that level of digging, neither can the het up US wonks.
Free school meals aren't as tasty as they sound
All children at infant schools will be given free school meals from 2014, Nick Clegg has announced, at a cost to the taxpayer of £600m.
On the face of it, the policy is extremely bad. Children of parents earning less than £16,190 and/or receiving income support or other kinds of welfare are already entitled to free school meals, so, other than children whose parents are unaware that they are eligible, the main beneficiaries of this policy will be the children of middle-income families.
That’s the wrong kind of redistribution. There is a decent case for helping the children of poor families who simply cannot afford to give their kids a decent packed lunch, but extending that to all children requires pretty big (and probably wrong) assumptions about parental fecklessness and state effectiveness.
But there is a complication. Trials that tested universal free school meals in schools across three local authorities between 2009 and 2011 found that extending meals to some students didn’t do much, but making them universal correlated with 1.9% and 4% improvements in literacy at Key Stages 1 and 2 respectively and 2.2% and 5.5% improvements in maths at Key Stages 1 and 2. (pp 143-144)
If those numbers really were caused by making free school meals universally available (and they were more cost-effective than alternative ways of spending that money), there would seem to be a strong case for the policy. However, the authors of the government’s impact report point out that, basically, they don’t understand why this relationship exists. Neither attendance nor behaviour were affected, so they assume that free school meals led to greater classroom ‘productivity’.
What if they’re missing something and the free school meals aren’t the causal factor? Or what if nationwide implementation has bad unintended consequences we can’t foresee?
That’s exactly what happened when California rolled out a state-wide class-size reduction programme, an example given by Nancy Cartwright. Despite doing well in randomized controlled trials in Tennessee, in California the programme had no real effect on outcomes. The sudden need for lots of new teachers meant that more bad teachers were hired; and not all of the factors that made smaller classes helpful in Tennessee were present in California. Evidence isn’t always as transferrable as we’d like it to be.
That’s not really a good reason to think the policy will fail, but it should temper our enthusiasm for rolling it out nationwide. What works in Wolverhampton might not work in West Sussex. Indeed, what works in a particular school in Durham might not work in another school across the county. In some schools, universal free school meals might be just what the doctor ordered. In others, headmasters might think that fixing their school’s dodgy central heating would be a much better use of the money.
Ultimately, it boils down to the principle we go on about again and again here at the ASI: devolving choice down to the most basic units possible. The available evidence does suggest that “universal free school meals” are a good policy, but that evidence is quite limited. The complexity of these things means that rolling it out nationwide might not achieve what we’d hope.
Better to give schools the money and the information and let them decide what to do with it. That way, instead of basing a national policy on the results of a few randomized controlled trials, the process of experimentation and discovery can be ongoing across the country.
Heavens to Betsy, Robert Reich almost gets one right
Unfortunately Robert Reich is not a perfect guide on what not to do as he sometimes almost manages to get things right:
These rules don’t exist in nature; they are human creations. Governments don’t “intrude” on free markets; governments organize and maintain them. Markets aren’t “free” of rules; the rules define them. The interesting question is what the rules should seek to achieve. They can be designed to maximize efficiency (given the current distribution of resources), or growth (depending on what we’re willing to sacrifice to obtain that growth), or fairness (depending on our ideas about a decent society). Or some combination of all three — which aren’t necessarily in competition with one another.
Markets do indeed exist in nature: the male bower bird building a shelter in return for a legover is and exchange in a competitive market whatever else it might be as well. But yes, it is true that the rules define the markets and we can indeed play with the rules to push one or more of those ends. But it's not quite any mixture will do:
Evidence suggests, for example, that if prosperity were more widely shared, we’d have faster growth.
Not really, no. For it would depend upon how we made that properity more widely shared. Higher taxes and more redistribution could well have higher deadweight costs than whatever greater growth more widely shared prosperity might putatively provide us.
But then of course Reich goes so horribly wrong:
Instead, the rules are being made mainly by those with the power and resources to buy the politicians, regulatory heads, and even the courts (and the lawyers who appear before them). As income and wealth have concentrated at the top, so has political clout. And the most important clout is determining the rules of the game. Not incidentally, these are the same people who want you and most others to believe in the fiction of an immutable “free market.” If we want to reduce the savage inequalities and insecurities that are now undermining our economy and democracy, we shouldn’t be deterred by the myth of the “free market.”
Those things described, the buying of influence at the political court, are not free market. Indeed, the solution to those things is to have a free market: one not influenced by politics and thus one in wihch purchasing politicians gains one no advantages. That is, Reich is reliably wrong again in the actions he calls for, for free marketry is the solution for exactly what he is complaining about.
Bleeding heart libertarianism and British politics
I have a chapter in a new publication by Liberal Reform, the classical liberal movement within the Lib Dems, in which I make the case that non-libertarians and libertarians may find a surprising amount of common ground if they put their differences of opinion about wealth and income redistribution aside. (Unfortunately, you have to sign up to Liberal Reform's mailing list to read that piece. You use my email address to login instead: sam at adamsmith dot org)
Basically, the chapter is an attempt to sketch out a British political economy of Bleeding Heart Libertarianism, the movement that has sprung up around American philosophers like Matt Zwolinski. The main areas I identify are immigration reform, drugs legalization and 'modern mercantilism' (a broad term for corporate and middle-class welfare).
I do think there's a lot of common ground between libertarians and people on the left, but for a serious dialogue to work I propose that libertarians shift their focus from opposition to wealth and income redistribution to a single-minded focus on the regulatory apparatus of the state:
I suggest that libertarians concerned with the plight of the poor should abandon their opposition to wealth redistribution in practice and focus instead on the regulatory state, where we have a much greater degree of certainty about the harm caused. For libertarians who wonder if they are BHLs, the question might be: If libertarian institutions existed and serious, significant poverty persisted, would state action be justified in acting to relieve at least some of that suffering, if we had a pretty good reason for thinking that that action would work?
I think that it would, and if you have a serious commitment to welfare so should you. The only problem should be an empirical one, which I cannot say is strong enough to reject all wealth redistribution. While I am extremely confident about the benefits of liberalising planning to allow new homes to be constructed in the UK, I feel less confident about saying that all redistribution is harmful.
So I propose a compromise: a ‘libertarian welfarism’. This might see us reform tax credits and the welfare system into a combination of universal basic income and a ’negative income tax’ that acts as a top-up to people’s wages, adjusted to give a little more to people in low-income jobs and the unemployed. The details of this approach to income redistribution are not important for now: what matters is the idea of a simple, cash-based redistributive mechanism. I find myself very comfortable with this kind of redistribution; other libertarians will be less so. But perhaps they could accept it as the cost they have to pay to persuade others about the other, much more important, things they have to say.
I expect many people to find this kind of thinking quite outrageous, but to me the really strong arguments for libertarianism are based on our beliefs about ignorance and incentives, not justice, so they should only preclude redistribution of wealth as a matter of pragmatism. There's no intrinsic reason you can't combine those ideas with "left-wing" beliefs about what a good world looks like any less than they can be combined with "right-wing" beliefs about the kind of world we watnt. I don't know if libertarians will ever be able to have the same influence on the left that we've had on the right, but it's worth a try.