Adam Smith tells us about the private financing of science

The New York Times has one of those very New York Times pieces about the funding of science. They note that the usual cast of billionaires are upping their spending upon scientific research. The problem with this is that, according to the New York Times at least, this means that people get to fund the sort of research they like to fund rather than fund research that meets the approval of the sort of people who run government and the New York Times.

Imagine that, people being able to do what they wish with their own money and without the wise council of the NYT? Horrors, eh?

They do note that the initial effect of the influx of money is good. Then they start to worry about the following:

The issues are considered social as well as intellectual, and so, in their own grant-making decisions, federal agencies strive to ensure that their money does not flow just to established stars at elite institutions. They consider gender and race, income and geography.

That's actually an excellent example of why we should welcome this private funding of science. For as Adam Smith pointed out:

Consumption is the sole end and purpose of all production; and the interest of the producer ought to be attended to, only so far as it may be necessary for promoting that of the consumer.

Which means that we want to get the most and the best science done for our cash regardless of gender, race, income or geography. And then there's an even larger mistake:

The official reticence about private science may reflect, in part, a fear that conservatives will try to use it to further a small-government agenda. Indeed, some of the donors themselves worry that too much focus on private giving could diminish public support for federal science. “It’s always been a major worry,” said Robert W. Conn, president of the Kavli Foundation, which has committed nearly a quarter of a billion dollars to science and is part of the private effort to increase financing for basic research. “Philanthropy is no substitute for government funding. You can’t say that loud enough.”

But it is exactly a substitute. For the basic problem here is that scientific research, or at least the results from it, is a public good. It's non-rivalrous and non-excludeable meaning that it's very difficult indeed to make a profit from it. Thus there will be too little private investment in this sphere. This is the argument in favour of government funding of science, that scientific results are a public good. But if we can gain private finance, despite the public good problem, then we've solved that public good problem, haven't we? And therefore private funding, to the extent that it happens, is indeed entirely and actually a substitute for government funding.

To the extent that science is getting private funding this is indeed the perfect argument in favour of cutting public funding. And given the increased efficiency coming from not having to worry about race and gender perhaps cutting by more than is donated.

I'm afraid that the latest ONS statistics on health inequality are simply wrong

This is a point that I've made before here and it's no doubt one that I'll have to make again. The ONS statistics on health care inequality, deprivation and lifespans are simply wrong. Yes, I'm certain that they've been accurately collected, that the usual skill and excellence has been used in their presentation. And yet they are indeed wrong for they are not a representation of what it is that they are purporting to be measuring.

Children growing up in the richest areas of Britain can expect to live a full, active life for as much as 20 years longer than their counterparts in the poorest neighbourhoods, an official analysis shows. A generation of young people living in the most deprived areas are likely to see their health effectively broken 15 years before they even reach pension age, it warns. Those from more well-off backgrounds are forecast not only to live longer overall but to enjoy good health for a much larger proportion of their lives. Although it has long been recognised that there is gap between rich and poor in terms of life expectancy, the divide is more than twice as wide when viewed through health expectations. According to the Office for National Statistics, men from the most deprived 10 per cent of the population have an average life expectancy of just 73.4 years, compared with 82.7 years on average for those in the least deprived 10 per cent – a gap of more than nine years.

The full report is available here.

There are two major and two minor problems with the approach being used here. The first major one is that no one at all is measuring the lifespans of those born into or growing up in any area. What is being measured is the age at death of people in a particular area. And, as you might have noted from your own lives there's not all that many of us who actually die in the area of our birth or childhood. Certainly not at the level of detail that these figures use: the information is collected from 30,000 or so areas, or some 2,000 people in each. I would lay pretty good odds that the vast majority of this country moves more than a couple of streets over their lifetimes. Which means that we might well be measuring something interesting: perhaps the way in which the rich, those with likely longer lifespans as we know, move into less deprived areas over their lifetime as they, well, as they become rich.

This leads onto our second major problem: the way that these figures are interpreted is that it is the inequality and deprivation which leads to the health and lifespan inequality. But we know absolutely that while this could be, probably is, true in part, we also know absolutely that it is not true in whole. For health inequality will also lead to wealth and income inequality. That poor sod permanently laid off sick at the age of 40 just isn't going to become one of the financial grandees of the country living in a pile in some undeprived area. So some part (an unknown part) of the inequality that we note will have a reverse causation to the one being assumed. Even assuming that inequality (to say nothing of deprivation) causes lifespan inequality, we also know that health inequality will cause income inequality.

One minor problem is the level at which this information is collected. When we're looking at groups of 2,000 people we really are looking in much too much detail. You'd only need a decently sized old agers home in such a district to rather sway the figures. I can point you to a couple of streets in the centre of Bath with an age profile wildly higher than that of the town or the SW in total. Because they happen to be the couple of streets where a long running (and very good indeed) charity run sheltered accomodation for old folks of the town. And this then brings us on to our second minor problem. The poverty rate (a useful synonym for the deprivation rate) is lower for the old these days than it is for the general population. Thus we would expect an area with lots of old folks to have a lower deprivation rate than one without.

These figures will, as with the earlier ones from the Marmot Report, end up being used to argue that deprivation and inequality kill therefore we must have more redistribution. You can hear the pencils being sharpened for the compsing of the tirades already. But this simply isn't what the figures are telling us because they simply are not measuring what it is assumed that they are.

No one at all is measuring the life spans of people born and or brought up in different locations. They are measuring the age at death of people in those areas, an entirely and completely different thing.

Some political ideas are simply stupid

Sad to have to say it but some of the ideas that come from our current political class are just so stupid that they should have remained unuttered. Like this one that's just come from the green wing of the Lib Dems:

Liberal Democrats want to ban all conventional cars by 2040 and allow only electric and ultra-low emission vehicles on the roads. Every diesel and petrol car would be scrapped by then or earlier if there are enough technological advances. The extraordinary policy, contained in the Lib Dems’ ‘green manifesto’ launched this week, has the backing of senior figures including party president Tim Farron.

Let us start from the idea that the IPCC is correct, climate change is a problem that we need to do something about. Let us also, arguendo, agree that Lord Stern was correct as to what we should now do about matters. Excellent, what we should do is have a carbon tax equal to the social cost of the damage that emissions will do. And, here in the UK, we do indeed have a tax that performs that function for us. The fuel duty escalator was specifically brought in to "meet our Rio commitments" and it is now higher than that $80 a tonne CO2-e that Stern insisted that the tax should be. So, by the very arguments that have been used to persuade us that something must be done we are already doing that something.

Further, Stern (and all other economists) insist that this sole interference into the price system is all that we should do: and they also all make it very clear indeed that near random bureaucratic interference into that  price system fixing is going to be welfare destroying.

For here's what we're trying to do. We want to prevent people doing what causes more damage in the future than that thing produces benefits in the present. And we also want people to carry on doing things that produce greater benefits now than damage in that future. Because this is the method by which we maximise utility over time. Which is what the carbon tax achieves. People are priced out of doing things with greater costs than benefits while still enjoying those actions which produce greater benefit than cost.

Then along comes some nitwit who says that even though the use of petrol engines will produce greater benefits than costs we must still ban them. This must be the action that is being proposed here: if technology has advanced enough in 25 years time that non-petrol engines will provide greater utility than petrol ones then we will all naturally switch. If, on the other hand technology has not so advanced then the banning will be an obvious reduction in utility.

And that is why this is such a stupid proposal. If technology advances sufficiently then the ban is unnecessary. If it does not then the ban is simply making people poorer, that being the same statement as reducing utility.

What makes the proposal monstrously stupid is that we've already done everything we were supposed to do to beat climate change from fossil fuel powered vehicles. We've already got that carbon tax at over and above the social cost of emissions. Anyone who doesn't realise that just hasn't been paying attention to all that we're being told about climate change. And people who haven't been paying attention really shouldn't be proposing political policy, should they?

No, let's not expand the remit of the Low Pay Commission

Fundamental reform of the minimum wage is needed to keep the system that was introduced 15 years ago up to speed with the changing world of work, according to one of the policy’s key architects. Professor Sir George Bain helped formulate the scheme to tackle poor wages as founding chairman of the Low Pay Commission, the independent body which recommends pay levels to government. But he now wants the body to take on a wider remit, with greater powers. Prof Bain has worked with the Resolution Foundation think tank towards today’s(Thurs)) release of More Than A Minimum, a review of the minimum wage which recommends new ways to keep the commission relevant, now and into the future. Prof Bain said: “When I helped set the UK’s first minimum wage in 1999, it felt like an embattled experiment. Now the policy has the support of all parties and a powerful academic consensus shows it has raised wages without costing jobs.”

No, let's not do this. Quite apart from anything else that final sentence is blatantly wrong. The Low Pay Commission itself has pointed out that the level of the minimum wage of some years ago probably caused 30,000 job losses.

It simply isn't true that a minimum wage does not cause job losses: what matters is the rate of the wage and the significance of those losses. A minimum wage at £1 an hour would have no job losses because no one at all gets paid that rate. One at £15 an hour would have horrendous job losses. So no, I really don't think we want to have a quango cooked up and expanded by someone willing to deny the most basic point about the area under discussion.

But there's another much more important point here about bureaucracy. It's possible that the Low Pay Commission is indeed irrelevant. At which point we should abolish it of course, not attempt to expand its remit so as to give it something to do. And anyone looking at whether the LPC should expand, contract or continue should have had as part of their field of consideration the null hypothesis. Which isn't something that's going to come from the bloke whose baby it is.

This is all, I'm afraid, straight C. Northcoate Parkinson. We must constantly be on guard against bureaucracy being simply a bureaucracy: existing so as to gain budget and powers. And, I would very gently suggest, we should therefore assume at the beginning of all such evaluation exercises as this one, that the correct response is elimination. Only if extremely strong reasons for continued existence can be found should continuance be allowed. Sometimes this will be fairly easy: Royal Navy? Yup. At others times similarly so. Arts Council? Abolish, simples. But as I say, when the conclusion is that the remit should expand so as to make a bureaucracy more relevant then this is, of course, equivalent to stating that it currently has no relevance. Thus abolish.

If we're not brutal in this manner then we'll never get rid of any of them.

The NHS is meant to be for patients, not staff

Jeremy Hunt has annoyed people today by refusing to give NHS workers a blanket 1% pay rise on top of the incremental pay rise they were already supposed getting. That’s hardly a surprise: the NHS is a religion, and Hunt’s decision is the equivalent of giving the finger to the Pope. But he’s got a point.

According to the BBC’s Nick Triggle, “all NHS staff will be getting at least a 1% pay rise. Just over half receive incremental pay rises each year - determined by their length of service and performance. Those whose incremental increase is less will have their pay rise made up to 1%, but many will get more. Last year, the average incremental pay rise was 3.5%.”

In other words, today’s announcement means that NHS staff won’t be getting an additional 1% pay rise over their existing agreed pay increases. That’s a real terms drop, but lots of the coverage I’ve seen has suggested that this means that nurses won’t be getting any rise at all.

Remember that real private sector wages have fallen every year since 2010. Public sector workers already have greater job security than private sector workers, so it's difficult to see why they should be regarded as being automatically entitled to pay rises that most private sector workers aren’t getting.

Obviously, there’s no ex-ante reason NHS staff should get a pay rise. The point of the NHS is to provide care for patients, not to provide welfare to NHS staff. Since the NHS's budget is limited, a pay rise to staff means foregone spending elsewhere.

It’s worth noting that, at least according to the government, this pay rise would be equivalent to 6,000 nurses. Now, I don’t know how the NHS should spend its money – it may well be the case that NHS patients are better served by additional staff or more investment in medical equipment than they would be by this wage increase. Maybe a pay rise is the best way to improve patients’ outcomes, maybe not.

I’m left wondering why NHS pay should be a political issue at all. In the end, this story just underlines the need for devolution of pay bargaining to NHS trusts. National pay bargaining makes little sense given differing labour markets and patient needs across the country. In other words, a pay rise that makes sense for patients in Suffolk may not make sense for patients in Sunderland. We don’t want Whitehall to determine supplies of medical equipment or the allocation of labour hours between staff. Why should pay negotiations be any different?

This is why the nef is known as not economics frankly*

There is good reason to wonder about the new economics foundation, nef, and they've given another one of the interesting data points today. They're arguing that climate change forecasts are more accurate than the economic forecasts that we use to try to plan the economy.

In fact, climate forecasts are actually outperforming many of the key economic forecasts cited by government departments and journalists. Looking at a selection of key long-term forecasts – population, debt-to-GDP and oil price – we can see that not only do many of the actual observations fall well outside the forecast range, the expected trend was way off the mark as well. But have you ever heard these measures condemned as “mumbo jumbo” in the media? Common sense tells us that public policy decisions must be based on the information and tools we have available. What our new paper makes clear is that climate change forecasts offer just as much, if not more certainty as long-term economic forecasts. The argument that climate science is just too uncertain to inform long-term spending decisions can no longer be used as intellectual cover.

Let us leave aside one little problem, which is that they seem to have forgotten (OK, that assumes they ever knew) that the IPCC climate papers are based upoon a foundation of economic forecasts. Which they must be of course. The SRES, that set of recasts, is needed because we need to have the number of people, how wealthy they are and what energy generation technologies they're using to be able to calculate what emissions are going to be. So, any accuracy concerning the IPCC reports on such matters is in fact because of the accuracy of the earlier economic forecasts.

But let us, as I say, leave this aside. Let us instead consider what they think that they're telling us.

We have distinct problems in coming up with sensible plans for dealing with climate change even though that information and those forecasts are better then the usual economic ones. So, where does this leave the usual nef idea that we should be planning our economy? Presumably wandering around in hte dark of insufficient information to be able to plan anything at all.

Which does, I'm afraid to have to point out, seem to put the total kibosh on everything else the nef has ever said about anything ever.

*Originally coined by Giles Wilkes who is currently buried in the anonymity of SpAdism.

Regulation seems to cause bank crises, not prevent them

City AM's Pete Spence (formerly of this parish) reminded me of Mark Carney's claims in January that free banking systems are more unstable than regulated ones. I'm not so sure. Take a look at these two charts from George Selgin's Are Banking Crises Free-Market Phenomena?, which mark an x for every instance of a banking panic. The first chart is for unfree systems, the second for free systems:

In this case at least, it looks like the evidence is against Mark Carney.

In which I have to explain something to George Monbiot. Again

Unfortunately it's sometimes necessary, with certain people, to explain things again and again so that they finally get it. So it is with George Monbiot and the upcoming US/EU trade treaty. Here he is whining again that there will be a clause insisting that governments must obey their own laws:

But this is not all that democracy must give so that corporations can take. The most dangerous aspect of the talks is the insistence on both sides on a mechanism called investor-state dispute settlement (ISDS). ISDS allows corporations to sue governments at offshore arbitration panels of corporate lawyers, bypassing domestic courts. Inserted into other trade treaties, it has been used by big business to strike down laws that impinge on its profits: the plain packaging of cigarettes; tougher financial rules; stronger standards on water pollution and public health; attempts to leave fossil fuels in the ground. At first, De Gucht told us there was nothing to see here. But in January the man who doesn't do give and take performed a handbrake turn and promised that there would be a three-month public consultation on ISDS, beginning in "early March". The transatlantic talks resumed on Monday. So far there's no sign of the consultation. And still there remains that howling absence: a credible explanation of why ISDS is necessary. As Kenneth Clarke, the British minister promoting the TTIP, admits: "It was designed to support businesses investing in countries where the rule of law is unpredictable, to say the least." So what is it doing in a US-EU treaty? A report commissioned by the UK government found that ISDS "is highly unlikely to encourage investment" and is "likely to provide the UK with few or no benefits". But it could allow corporations on both sides of the ocean to sue the living daylights out of governments that stand in their way.

That it's not going to do much of any importance in the UK is true. But this is because the UK Government generally obeys the laws that it itself has passed. And this is not true of all and every government in all and every country around the world: not even, sadly, true of each and every government of each and every country here inside the EU.

And this is indeed very much the point of this sort of arbitration. It is, quite simply, to make sure that a government keeps its word. That it does not, after someone has made an investment into the country being governed, change the rules so as to, say, confiscate some part of that investment. And the way we do that is by making sure that the court which decides whether the rules, the law, the agreement, has been broken is not under the control of the same government accused of breaking the rules, the law or whatever agreement there has been. And that's all it is about too.

Any government can still go off and, say, nationalise anything it wants, whoever owns it. That's a legitimate, if stupid, use of State power. But the insistence that it is someone outside the country that determines the price that must be paid to the original owners seems sensible. And for an example of what happens when this is not the case we only have to look back to, as I've mentioned before, the Greek bond haircut.

If you were an investor in Greek government bonds that were issued under Greek law then you get shafted. For the Greek government changed the law after the issue of the bonds on what was needed for the collective action clauses to be valid. That is, when the borrower is obviously bust (as Greece indeed was) then clearly there's going to be a restructuring of those bonds and or loans. The creditors are just going to have to take a haircut. However, there are usually clauses which detail the level of agreement that is necessary between creditors and the debtor before this can happen. The general rule is that 90% of the creditors have to agree to the level of the haircut. The Greek government unilaterally changed this to 75% and this made their cramming of a deep deep haircut onto the creditors easier.

If you had Greek government bonds issued under English law you didn't in fact get that haircut: they were repaid in full. Because the Greek government didn't have the power to get the English law changed in that manner. It's a good example of why you would like to have legal matters dealt with by people who aren't the government that you might end up having the argument with. And that is, again, why the whole idea of offshore arbitration exists. Simply to keep governments on the straight and narrow about obeying the law of their own land.

And to be honest, I can't actually think of a reason why this might be a bad idea. Shouldn't governments credibly commit to obeying their own law of the land?

No, I won't make the obvious joke about Ed Balls' latest idea but it's ____s

This latest idea from Mr. Yvette Cooper rather fails I'm afraid:

People earning more than £150,000 would get only 20 per cent tax relief on pension contributions, instead of the 45 per cent they receive now. Ed Balls, the shadow chancellor, will set out plans to pay for its Compulsory Jobs Guarantee, the centrepiece of the party’s welfare plans. Every young person jobless for more than 12 months will be given a “starter job” which they will have to take or lose benefits.

Leave aside, for a moment, what the money is to be spent upon. I've no real objection to the idea that it should be welfare and work, not welfare and no work. Look instead at what the tax proposal is.

To tax people who are saving for their old age. And there really is a problem in this, for we don't actually not tax people who save for their old age. What we do is delay the tax that must be paid by people saving for their old age.

We do this by not taxing them on the money that they put into their pension pots. And then we tax them on the pensions they receive when they retire. At, it should be noted, entirely the normal income tax rates.

So, what is being suggested now is that people should be taxed on the money they put into their pensions: and then be taxed again, in the normal manner, on the money they get paid in pensions in decades to come. This is, and I'm afraid that I am indeed the first to point this out, double taxation of the most wincingly bad kind. Because, unlikely though it may seem, we rather like people saving for their old age.

The Guardian puts a different spin on the same story:

Ed Balls, the shadow chancellor, will say on Monday that Labour will move to end the plight of "young people stuck on the dole" when he says that the party's compulsory jobs guarantee, to be funded by a tax on bankers' bonuses, will last the whole parliament.

These are the bonuses that the European Union has just slashed to the bone and which are, including national insurance, already taxed at rates of 60% or so?

That's going to raise a lot of money then, isn't it?

Immoral double taxation or a pittance in revenue raising. This hasn't been thought through as yet, has it?

Does the GOP need a new stool?

Does the GOP need a new stool?

This is the question that upcoming TNG guest Tim Stanley's been asking in a recent blogpost for the Daily Telegraph. To give a bit of context:

the Republican stool is at risk of losing its balance. As William F Buckley once argued, support for the GOP historically rests on three conservative legs: free market libertarians, social conservatives and foreign policy hawks.

However, in the absence of a strong anti-communist message American politics has drifted leftwards, whilst the GOP's 'Middle American' unity has been replaced with a "discordant alliance between wealthy grey technocrats and populist crazies". The legs of the Republican stool now look wobbly and unbalanced, leading to some uneasy and often contradictory politics. As a consequence, the Republicans fail to provide a convincing or consistent alternative to the liberals and Obamanomics.

So, what's the solution? Tim suggests that it lies in a 'rugged constitutionalism', where politics is conducted at a state level, individual freedom carries real significance, and Republican governments promise to largely get out of the way. Certainly, this has real appeal to libertarian-leaning conservatives both in America & the UK, but what's the likelihood of it actually becoming an election strategy?

Fortunately, under 30s are invited to ponder this question further at the TNG with Dr Stanley on this very subject tomorrow.

The event starts at 6pm in the ASI offices, and RSVP either on Facebook or to events@old.adamsmith.org.