Why India desperately needs the supermarkets

The Economist carries a story showing why India desperately needs the supermarkets. The example is all about a staple of Indian cooking, the red onion:

The journey of an onion from Mr Devkar’s field to the end customer in Mumbai takes only a few days but is enough to make you weep. There are some underlying reasons why prices have risen—higher rural wages have pushed up farmers’ costs. But the system is horribly fiddly. Farms are tiny with no economies of scale. The supply chain involves up to five middlemen. The onion is loaded, sorted or repacked at least four times. Wastage rates, either from damage or weight loss as onions dry out, are a third or more. Because India has no modern food-processing industry, low-quality onions that could be turned into paste or sauces are thrown away. Retail prices are about double what farmers receive, although the lack of any standard grading of size or quality makes comparisons hard. The system is volatile as well as inefficient. Traders who buy onions from farmers may hoard them, but for the supply chain as a whole far too little inventory is stored. As a result small variations in demand and supply are amplified and cause violent swings in price. In the first week of December 2013 prices fell again. It is easy to see how heavy investment by supermarket chains and big food-producers—whether Indian or foreign—could make a difference. They would cut out layers from the supply chain, build modern storage facilities and probably prod farmers to consolidate their plots.

The impoprtance of this story is not limited to India either. Here in the UK we hjave the usual suspects shouting about supermarkets and how they destroy the high street. But that's not actually the importance of the system at all. Whether the goods are sold from two 500 sq yeard shops or one 1,000 doesn't particularly matter. It's the entire logistics chain behind the system that does.

We also get told stories about the pernicious effects of how much food we waste as consumers: sometimes we're told that this is because the supermarkets make it too cheap for us to buy. But the other side of the absence of them and their logistics chains is that wastage described above. Indeed, other reports have put the amount of food that rots in inefficient supply systems in poor countries at 50% or more of all food grown.

We have and India needs the supermarkets not because of the shops but because of all the things they do to get the food into the shops.

There's a very strange American idea about dividends

I'm always confused by a slightly strange American idea about dividends. That if they are paid they are somehow wasted. This from Matt Yglesias is only one expression of the idea, there are many others:

Dividends, by contrast, have a weak and indirect impact on the economy and don’t really serve anyone’s long-term interests. We’re left hoping that rich shareholders will spontaneously develop enough appetite for extra yachts to push the economy forward. It’s a broken economic model that only deepens the disconnect between the stock market recovery and the ongoing labor market slump.

This is entirely wrong, of course. Dividends are the returning to shareholders of some portion of the company's profits. OK, that much is fine: but what happens then?

Well, two things need to be kept in mind. The first is that pretty much all innovation and again, pretty much all of jobs growth comes from new firms. Extant firms tend to reduce their number of employees over time as they become more efficient at whatever it is that they do. So, we'd really rather like some method of getting money out of extant companies and into new ones.

The second is that most stocks and shares are held either by wealthy people or by the various pension and insurance funds. And what is it that we know about those two groups? Any dividend income that they receive is likely to be reinvested. And that will of course be into different companies than the ones they received the dividends from and some portion of it will indeed flow to new companies.

Hurrah! we now have our method of directing the profits from extant companies into the financing of new ones which is the very thing that we desire in order for there to be further innovation and growth in the economy.

Dividends are not some short term failing of the financial marketplace, they're the very basis of its long term success.

Summary

Video: Ayn Rand Lecture 2013 by Lars Seier Christensen

Lars Seier Christensen is CEO and Founder of Saxo Bank. You can read a full transcript of this speech here. 

An excellent point about free trade

From Don Boudreaux's quotation of the day series:

After 1860 only a few import duties remained, and those were exclusively for revenue on such non-British commodities as brandy, wine, tobacco, coffee, tea, and pepper. In fact, although most tariffs were eliminated altogether and the rates of duty on all others were reduced, the increase in total trade was such that customs revenue in 1860 was actually greater than that of 1842.

Another spotting of the Laffer Curve in the wild there of course.

But it's worth noting that tariff changes weren't the only thing going on at this time. There was also a quite radical change in shipping technology: we were at the beginning of the steam age here. As another example, after the US Civil War there tariffs pretty much doubled: but the prices of imported goods fell. For we need to remind ourselves that the full cost of trade protection is the artificial barriers of the tariffs, the non-tariff barriers from bureaucracy (famously, Mitterand only allowed VCR imports through one French port with only three customs inspectors) and the transport costs. For the US the fall in late Victorian shipping costs was greater than that rise in tarrifs.

And we can also use this to explain a part of our modern world. Yes, it's great that tariffs have come down in this post-war period. But this is also the time of the shipping container: 30 tonnes of pretty much anything can be moved pretty much anywhere for under $5,000 these days. International trade would have increased massively even if tariffs had stayed at their old rate.

And this leads us to a point that those who promote infant industry protection need to face: the tariff levels you would need to be able to successfully protect local industry would be so high as to probably not be politically possible.

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?

The insanity of current green power subsidies

As I have been saying for some time now the basic structure of subsidies to the various green power technologies is insane. Policy Exchange have just released a report making much the same point (although, inevitably, they are rather politer about it than I am).

The report says that plans to introduce auctioning to enable all technologies to compete on a level playing field should be brought forward.

The thing is that the system should have been that way all along. Now leave aside all of the arguments about whether climate change is happening and all that. For the sake of argument, assume that it is and also that we must do something about it. OK, what?

We would obviously like to reduce the emissions from energy production and increase and or support the production of energy from non-emittive sources. Clearly and obviously that's what we want to do.

But there's a very important point to be made: we don't actually care what non-emittive technology comes forth. We are indifferent, entirely, between oneshore wind, offshore, tidal, solar, biogas and all of the rest. We care about the amount of electricity we can get from each one, sure, about the price of each of them too, but we really don't give a damn which is used: we want simply to be able to use the cheapest one.

At which point there are two methods of encouraging the development of these alternatives. The first would be a carbon tax. Make the fossil fuel stuff more expensive by whatever amount we calculate the future damages will be. If no alternative can produce at those prices then we're all left the best off we can possibly be by still using fossil fuels. If any or various of the alternative methods can beat that price then again, we're left the best off we can possibly be.

Alternatively, we can fix the price of electricity from these various alternatives: those feed in tariffs. But again, here, we want to have one price. Non-emitting electricity is worth £x to us. Great, so all non-emitting electricity gets price £x. We don't do the damn fool thing that the government has been doing for the past decade which is offer different prices to the various different technologies.

So it's not just that this level playing field should be brought forward: it's that it should have been a level playing field all along. For the current system is indeed insane to the point of absurdity. The worse the technology, the more costs a technology imposes upon us all, the more we subsidise it. What?

Chart of the week: US broad money still reliant on QE

Summary: Tepid US broad money growth still dependent on QE

What the chart shows: The chart shows the annual percentage change in US broad money and in credit to the non-bank private sector. Broad money is the recreation by Stein Brothers of the M3 measure discontinued by the Federal Reserve in March 2006.

Why the chart is important: US broad money growth continues to oscillate around 5%. This is better than the 4% M4 growth seen in the UK and considerably better than the 1.4% recently registered for October in the euro area. Nevertheless, US bank balance sheets – and hence broad money growth – still seem dependent on continued quantitative easing. Since the Fed’s ‘taper terror’ subsided in September, broad money has grown by $135bn, compared with the $160bn the fed has spent on buying assets from the banking system over the same period. Total bank credit has grown by $36bn and loans and leases by $19bn (the difference between total bank credit and loans and leases in bank credit is lending to the public sector). By contrast, cash assets have grown by $191bn. What this all means is that US banks are still stocking up on cash and that credit growth remains weak. The economy seems strong enough to support the beginning of a QE taper; but the development of bank balance sheets over the first two or three months after a taper begins, will be a key pointer as to when it will actually end.

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?

So that's the gender pay gap solved then

We've the release of this year's figures about the gender pay gap and it seems that we'rte pretty much done, we've solved it. The full figures are here. As I've been saying for a number of years now there most certainly used to be gender discrimination in pay. What we want to know now though is whether there still is? And as that chart shows, no, it's very difficult indeed to see that there is. For in the 18 to 40 group pay is indeed roughly equal. It's only in the older ages groups, those who coupld well have suffered from the earlier discrimination, that we are still seeing significant differences in pay.

So, we can declare victory and go home then. Except, of course, there are those who willfully misuse the statistics to insist that more must be done. As in The Guardian:

More than 40 years since legislation was introduced which outlawed paying men and women different wages for the same work, women still face a lifetime of earning less. New figures from the Office of National Statistics show the pay gap is beginning to widen, after years of slow but steady progress. Looking at mean average earnings

And they should be slapped with a wet haddock for that. Because they have been told, repeatedly, that you should use the median average when discussing these figures. The mean is too distorted with the incomes of the 1%, and the 0.1%. What encourages me is that the comments section is full of people pointing out the faults with the assertions being made.

And as to exactly what it is that we did to get rid of that gender pay gap? At root I think it's simply the way work has changed. The more muscular male physique no longer matters in anything but a tiny minority of jobs. Thus there's no particular reason for men and women to be paid different amounts therefore they're not.

How hysterically funny about Mazzucato's "Entrepreneurial State"

You will recall that a central theme of Marianna Mazzucato's book, The Entrepreneurial State, is that all this gee whizz techno shiny shiny that we see around us really comes from stuff that the government has originally subsidised, invented, come up with or otherwise spirited into creation. And of course, the outcome of this is that all your money belong to us.

And one of the examples she gives is the way that the British government subsidised the work that made Apple's iPhone a possibility. Specifically, on touch capable screens able to understand dual movements (things like "pinch and zoom"), something crucial to the technology.

Ah, sadly no, as my sometimes colleagues over at The Register reveal. In fact, a plucky British inventor did come up with the idea, did indeed go to the government and they screwed around so much and for so long that another inventor got there first and was bought up by Apple.

Fentem submitted a funding application to Nesta in January 2003, while he continued to work on new prototypes. "When I first approached Nesta I was told that I would receive a funding decision within 6 weeks," he says. "However, it took Nesta a year to just write the contract. To put that in perspective, it took Apple only 2 years to conceive, develop and commercialise the entire iPhone."

It's worth reading the whole five pages at Andrew Orlowski has done an excellent job there. And the truth is that Nesta, the British government, did not in fact develop multitouch screens. In fact, they managed to cock up the development process so badly that someone else developed it. An advertisement for government direction of innovaiton this is not.

And it also rather guts Mazzucato's basic contention.

One problem, as I see it, is that it is in fact true that invention doesn't happen in isolation. We're all standing on the shoulders of giants after all. But what that means is that the next incremental improvement in whatever it is is ripe, ripe for the plucking as a result of all of the thousands of years of science and technology that we already have. That in turn means that to pluck it one needs to move quickly. And quick movement is just not something you're ever going to get when the State is involved.

Basic scientific research? Dreaming in ivory towers? Sure, the results will be public goods and there's a good argument for some tax funding there. But it's just not going to work in developing actual products and technologies. As the screens for the iPhone show, whatever the stories that Mazzucato is telling.