Prof. John Hibbs: an influential life
We are sad to learn of the death of Prof John Hibbs in his 89th year. Dr Hibbs was a celebrated transport economist who chose to publish many of his scholarly studies with the Adam Smith Institute. He was hugely influential in the denationalization and deregulation of the UK's bus industry. He wrote Bus Deregulation: the Next Step (1982), The Debate on Bus Regulation (1985), Deregulated Decade (1997, with Matthew Bradley), Tomorrow's Way (1992, with Gabriel Roth) and Trouble with the Authorities (1998).
Dr Hibbs was an active supporter of the ASI, as a member of our Scholars' Board and as a frequent presence at our lunches and lectures. He was full of courtesy and charm, and always found time to talk to our young members. A full obituary can be found here.
The innocence principle
Like freedom of speech, the presumption of innocence before proof of guilt is something that almost everyone agrees is important in principle, but are occasionally reluctant to apply in practice. In recent weeks we have witnessed some examples of this reluctance that, to me, seem chilling. Eric Garner was an obese African-American who was killed by police officers holding him in a chokehold while they arrested him for illegally selling individual cigarettes in New York City. His last words are here.
Virtually everyone who has seen the video agrees that they acted with an extreme amount of force against a man who was not fighting back although he was resisting arrest (passively – that is, in a way that would not harm the officers).
A Grand Jury found that the police officers who killed Eric Garner did not act unlawfully. I defer to the Grand Jury on this, but assuming they are correct this suggests that the scope for lawful killing by police officers is extremely broad. As law professor Glenn Reynolds (and others) has noted, killings by police are treated much more sympathetically by juries than killings by civilians.
Michael Brown was an African-American teenager who was shot and killed by a police officer during an arrest after he (seemingly) robbed a convenience store in Ferguson, Missouri. There is still some disagreement about what happened here. The initial reports suggested that the officer executed Brown as he fled or begged for his life, but the subsequent Grand Jury investigation seems quite conclusive that Brown assaulted the police officer. The Grand Jury’s conclusions prompted looting by people in Ferguson.
If Brown’s shooting was unjust, the Garner lesson applies. But if the narrative found by the Grand Jury is correct then the protests, lootings and slandering of the police officer involved are wrong. In that case, it is the media’s presumption of guilt on the part of the police officer involved (even after the Grand Jury verdict) that has led to significant destruction and violence. People suspended the innocence principle to advance a political point, and the results have been bleak.
Jackie is a student at the University of Virginia by a Rolling Stone article which alleged that she had been gang-raped by a group of fraternity men. Last week Rolling Stone retracted the story after a number of facts given by Jackie in her story proved to be false.
The aftermath of the Rolling Stone story has been extremely disturbing, with very prominent people proudly dispensing with the innocence principle. The Washington Post ran a piece titled “No matter what Jackie said, we should automatically believe rape claims” (this was later changed to “generally” believe them). The Guardian’s Jessica Valenti wrote that “I choose to believe Jackie. I lose nothing by doing so, even if I’m later proven wrong”, and that “the current frenzy to prove Jackie’s story false – whether because the horror of a violent gang rape is too much to face or because disbelief is the misogynist status quo – will do incredible damage to all rape victims.” [my emphasis]
Has Valenti considered that someone else may lose something if we chooses to believe an accusation that is untrue? Or that we may have other reasons than misogyny or incredulity to want to know if a criminal accusation is false?
Sexual assault is very common, but this does not mean that false accusations do not occur. An estimated 1.5% to 7.5% of accusations may be false. Staggeringly, a 2012 study that used DNA testing of old physical evidence and exonerated between 8% and 15% of convicted rapists.
I know why Valenti is eager to believe Jackie: because not believing a genuine story is horrendous for the victim and makes other rape victims less likely to come forward, and hence makes rape an easier crime to commit. But the inverse is also true: believing a false story is horrendous for the wrongly-accused and makes other false accusations more likely. (The Rolling Stone story did not name individuals, but guilt-by-implication can still be enormously harmful.)
In all of these cases, people who would normally say that the presumption of innocence before proof of guilt is a good thing have assumed the opposite. The rule might work in general, they may say, but this case is an exception. Police need to be able to subdue people resisting arrest. The death of an 18-year old must be unjust. Rape is too serious an allegation to question.
Like the principle of free speech, the innocence principle only produces good results if we apply it rigidly and in cases where doing so may feel deeply unsettling.
The innocence principle matters because people who seem guilty may in fact be innocent. This is why mechanisms like jury trials exist – like the ‘thick’ version of free speech that I argued for recently, they are a mechanism for sorting the truth from lies.
Hayek speculated that liberal institutions like these evolved over time, because the societies that lacked them eventually fell behind the ones that upheld them. Politically and culturally, we may be witnessing an erosion of these institutions now. That would be a catastrophe. But it is not too late to change course.
An uncomfortable truth about state funding
George Monbiot has decided to treat us to his manifesto for a better country. There's evidence, of course there is, of his deep and abiding confusion over how to deal with corporate power: freer markets. He is being both anti-market and corporate power. Something that is really most odd as it is that competition in markets that tempers corporate power. As even a most cursory glance at an economic model will show. It's right there on the first couple of pages of any textbook: that (admittedly mythical, but real economies do tend towards the state) free market is defined as one in which no producer, no corporate, has market power. However, the point to really take issue with is the following:
A sound political funding system would be based on membership fees. Each party would be able to charge the same fixed fee for annual membership (perhaps £30 or £50). It would receive matching funding from the state as a multiple of its membership receipts. No other sources of income would be permitted.
No, just no. For when it's the State deciding who can have the money to be in politics then only those with State approved policies will be in politics. This is the way that the Communists of central Europe controlled those societies. Only state funding was allowed and if you didn't toe the communist party line you didn't get any funding. And it's not just such totalitarian states either. Vlaams Block suffered much the same fate. They were found to have been advocating policies that the establishment did not like and were then cut off from that state funding. The only form of funding allowed to Belgian political parties.
Yes, we are aware that that was all over accusations of racism, no we are not racists nor do we support Vlaams Block. However, if your definitions of freedom and political liberty do not include freedom and political liberty for those you disagree with, however vehemently, then they're not really notions of freedom and political liberty, are they?
State funding would mean that only those political ideas that are approved of by said state will receive funding. And insisting that no other funding is allowed will ensure that unapproved ideas cannot be heard. This applies to the racists, communists, Fascists, free marketeers, socialists, capitalists and the Monster Raving Loonies because that's just what political liberty means. Any and everyone can associate freely, band together to use their voices, assets and votes, as they wish.
Oil prices, Iranian economic sanctions and the Strait of Hormuz
Just as Russia is feeling the pinch from the drop in oil prices (both leading up to and after OPEC’s decision not to cut production further), Iran is feeling the pinch too (being one of the main countries that desired a cut in production but was rebuffed by Saudi Arabia). It is hardly surprising that Russia sees incentive to engage in increasingly aggressive geopolitical posturing when oil-revenue makes up a substantial part of its income. However, things have been eerily quiet in the Persian Gulf. Iran, being arguably probably in a far worse position, does not have the Russian luxury of nuclear power status or an extremely advanced, formidable Navy that can match the US. However, the Iranian government still has incentive to increase oil prices and it is strategically positioned next to the infamous Strait of Hormuz, one of the world’s most important oil chokepoints.
Iran threatened to shut off the Strait of Hormuz in 2011 in response to US-led economic sanctions but this did little to unnerve markets since there was confidence in the US’s ability to swiftly resolve such an eventuality. Going into 2015, oil prices are forecasted to remain low and often forecast to go even lower. Simply raising tensions around the Strait whilst not actually shutting it off (this could be accomplished by perspicuous naval manoeuvring, aggressive press statements etc.) could quickly escalate into something more if responses are miscalculated and intentions misjudged. Such tensions are really not needed in this fragile macroeconomic and shaky geopolitical climate.
Easing up on at least some of the economic sanctions on Iran (even if they are only token concessions) will enable the Iranian government to at least appear to be in a stronger negotiating position (despite suffering from a very real deterioration in bargaining power from falling oil prices) and it may, thereby, delay or even help prevent possible future aggression. It would also help ensure that cash-strapped citizens across the world enjoy the benefits of cheaper oil for longer whilst decreasing the punishment of Iranian citizens (most of whom have little to no say when it comes to their government’s nuclear program).
Free trade with Iran is unlikely for the foreseeable future but even some token easing of trade restrictions could help preserve our increasingly shaky, threatened (relative) world peace.
Minimum wage debate: probably not over
The debate among economists over whether (higher) minimum wages cause (more) unemployment seems to go on forever. Most published results (and an even greater fraction of methodologically sound published results) find that minimum wages reduce employment. But this doesn't settle the result, and smart, eminent economists like Arindrajit Dube publish papers arguing that with different methodologies and/or correcting for appropriate trends, you cannot find a link. Though this seems to go against our basic model of the microeconomy, economists argue that employers of the low-skilled are monopsonists—single buyers, the converse of monopolies, single sellers—and may even want more labour when its price rises. Those who do believe that minimum wages put people out of work, when faced with results finding they don't, suggest that maybe this just a temporary effect; in the long run workers will be replaced with automation a la modern checkouts, or fewer higher-skilled people once they've had time to search. Or alternatively, less will be spent on working conditions or other benefits.
Given this morass of disagreement, a new paper from Jeffrey Clemens and Michael Wither is unlikely to change any minds, but it's still an interesting result. They use nifty controls to establish that binding minimum wages cause unemployment, lower wages from work, and worse work progression for the low-skilled. This dearth of work experience, the authors say, makes them less likely to join the lower middle class. What's more, because their sample is very broad and spread out across the entire US, they believe their results are uniquely good for extrapolating to the country as a whole.
We estimate the minimum wage's effects on low-skilled workers' employment and income trajectories. Our approach exploits two dimensions of the data we analyze. First, we compare workers in states that were bound by recent increases in the federal minimum wage to workers in states that were not. Second, we use 12 months of baseline data to divide low-skilled workers into a "target" group, whose baseline wage rates were directly affected, and a "within-state control" group with slightly higher baseline wage rates. Over three subsequent years, we find that binding minimum wage increases had significant, negative effects on the employment and income growth of targeted workers. Lost income reflects contributions from employment declines, increased probabilities of working without pay (i.e., an "internship" effect), and lost wage growth associated with reductions in experience accumulation.
Methodologically, we show that our approach identifies targeted workers more precisely than the demographic and industrial proxies used regularly in the literature. Additionally, because we identify targeted workers on a population-wide basis, our approach is relatively well suited for extrapolating to estimates of the minimum wage's effects on aggregate employment. Over the late 2000s, the average effective minimum wage rose by 30 percent across the United States. We estimate that these minimum wage increases reduced the national employment-to-population ratio by 0.7 percentage point.
Food banks are stepping in where governments have created a mess
Mention the growth of food banks, with nearly a million users this year, and you conjure up a Dickensian image of a country on the breadline, chronically unable to feed its children, and a heartless government that is cutting benefits and quite willing to let them starve. The reality is very different. First, food banks are a great achievement of private charity. They flourish in the world's wealthiest countries – like the US, UK, Canada, and New Zealand – precisely because people in rich countries can afford to be charitable.
Second, around 60% of those using food banks in the UK are once-only users. In around 30% of cases, that is because of a hiccup in their social benefits – a sanction imposed because they haven't turned up to an interview, perhaps, or a delay in benefits starting after someone loses their job. This is not chronic 'food poverty' – it is people facing temporary crises, much of it due to the welfare bureaucracy.
Third, the rise in food banks started long before the government started reforming benefits. Nearly all food banks in the UK are run by a single Christian charity, the Trussell Trust. As it gets more experienced and slicker, more care workers have been referring people to them, and more people know about them. So the numbers of users have risen.
Fourth, remember that the UK spends nearly £100bn a year on welfare, around one-seventh of all government spending. Working age welfare costs each family in Britain about £3,000 a year. And since the best form of welfare is actually a paying job, it is good news that unemployment has fallen so quickly in the UK.
Some Church leaders want the government to get involved in the food bank movement. That is a grave mistake. Government money will come with delays and with strings. It will discourage private giving – why should individuals contribute if the government is doing it? And government interventions are most of the problem in the first place. World food prices have risen 25% since 2007, due in part to biuofuel subsidies that have taken land out of food production, and the EU Common Agriculture Policy, which adds 13% to Britain's household food bills. And family budgets are further squeezed by the 11% surcharge on electricity bills, destined for uneconomic wind turbines.
No, government would do better to get out of the way of private charity. It is only in the last few years that food banks could even advertise their existence. The benefits bureaucracy is notorious – which is why Iain Duncan Smith's efforts to simplify the system are so important. And we need more realistic food regulation so that shops have a better option than simply throwing out food that is unsold, and so that consumers do not think food is unusable just because it is past its sell-by date.
Once again, private charity is stepping in where governments – of all colours – have created a mess. All strength to them.
The last gasp for plain packaging
It's entirely possible to take a number of different views on the merits or not of the plain packaging proposal for cigarettes. An entirely unwarranted intrusion into commercial freedom by the usual prodnoses perhaps, a vital public health policy as some profess to believe. That we tend toward the former view while the prodnoses the latter isn't the point at issue here though. The interesting question is why is there such pressure for the law to be passed immediately?
The government is under fire from politicians on all sides amid fears that legislation forcing tobacco companies to sell cigarettes in plain packs will not be introduced before the general election.MPs from all three main parties, including the Tory chair of the health select committee, have warned time is running out to introduce a law that would see cigarettes sold in unbranded packs, a measure experts claim would deter young people from smoking. .... In a letter to the health minister Jane Ellison, the Tory chair of the health select committee, Sarah Wollaston, warns “unless the government makes a final decision soon, time will run out for a debate and vote before the election”.
A failure to implement the legislation to introduce what Wollaston describes as “one of the most important public health reforms of the last 20 years” would, she argues, “be an unnecessary and serious setback for public health policy, if the clearly expressed will of parliament were now to be frustrated”.
A failure to introduce the measure would cause tension in the coalition. Lib Dem health minister Norman Lamb said: “This is a landmark public health issue. I want the government to act while we have time before the election. From a Lib Dem perspective, we want this legislation to go through and that’s what we will fight for.”
In April, Ellison confirmed the government’s intention to “proceed as swiftly as possible” on plain packaging, noting evidence that it would “very likely have a positive impact on public health”.In a letter to Ellison, Labour’s shadow health minister, Luciana Berger, called for guarantees that the legislation would get enough parliamentary time to become law. Berger said that if the measure was not voted on before the election “it would be seen as a major victory for the tobacco industry”.
Why the rush? After all, whoever actually wins the next election there will still be a Parliament, one that can and will pass any number of laws.
The answer is contained in this from Chris Snowdon:
Two years on, we now have enough data on tobacco sales and smoking prevalence to say with confidence that plain packaging has had no positive impact.
The reason they're leaping up and down and screaming now, Now! NOW! is that the evidence of the effectiveness of the idea is now coming in. And it simply doesn't work: it does not do what it is claimed it should do. Regardless of what you think about the desirability of curtailing commercial freedom in the cause of reducing smoking rates, plain packaging simply doesn't reduce smoking rates. But there's people emotionally and politically invested in the idea so they insist that this must be imposed before anyone has a chance to actually consider this evidence.
Aren't we all just so ecstatically happy at the way we are governed?
How are your taxes spent
HM Revenue & Customs recently sent me an annual tax summary for 2013-2014. This is an interesting document as it shows how my income tax and national insurance contributions were calculated, and how my money was spent by the government. We know that the only certainties in life are death and taxes, but we often treat taxes in abstract and do not think about them in absolute and concrete terms. This new document provides a detailed monetary breakdown of how my taxes were spent excluding indirect taxes such as VAT and other duties.
A quick calculation of my contribution produced the following percentage breakdown:
| Welfare | 25% |
| Health | 19% |
| Education | 13% |
| State pensions | 12% |
| National debt interest | 7% |
| Defence | 5% |
| Criminal justice | 4% |
85% of my taxes were eaten up by the above categories. The balance was spent on transport, business and industry, government administration, culture etc. all less than 4% of the total.
I was stunned that welfare payments accounted for 25% of my total tax burden and that national debt interest accounted for 7%, higher than spending on defence at 5%. It should also be noted that state pensions accounted for over a tenth of my personal contribution.
We all have to individually decide if we are happy with the way our hard earned cash is spent. As Thomas Sowell said we all need to think what is the fair share of the money that I have earned that you are entitled to. But what the tax document maeks clear is that if the government is going to successfully reduce the national tax burden on the hard working people and families, then tinkering around the margins is not going to make one iota of a difference. Besides reducing the level of national debt, the only way forward is to tackle the top four categories that accounted for 69% of my taxes. This requires political will that may or may not be there.
But Minister, we don't do this sort of central planning around here
Ed Davey seems to be a little confused as to his correct role in the matters of the world:
Investing in fossil fuels is becoming increasingly risky because global action to tackle climate change will curb demand, forcing companies to leave unprofitable reserves in the ground, Ed Davey, the energy secretary, has warned.Financial authorities must examine the risks posed by coal, oil and gas companies to prevent pension funds investing in what could become “the sub-prime assets of the future”, Mr Davey said.
The comments are Mr Davey’s first intervention into the debate over the “carbon bubble”, the theory that the world’s existing fossil fuel reserves are overvalued because the majority must be left unburned in the ground if extremes of global warming are to be avoided.
Mr Davey told the Telegraph: “One has got to worry about the investments for pensioners.
"If pension funds are investing in companies or banks have on their balance sheets huge amounts of assets in fossil fuels, and those assets don’t give the return that people expect – because of changes in technology where low-carbon becomes cheaper or because of the world having to take action against carbon emissions – one has got to protect those pensioners and those investments.”
It's obviously entirely correct that the minister in charge of worrying about climate change should worry about climate change. Even, where and if action is necessary on the subject, suggest what action is necessary. However, in a market society that's as far as it goes. How people react to those plans and suggestions is entirely up to them and that includes where and how they invest their money.
Go away Mr. Davey, it's just none of your damn business.
As to the basic notion that fossil fuel reserves are going to be worth nothing in 50 years' time that's not particularly a problem. Anyone familiar with any part of the climate change debate should know about the controversy over discount rates: what interest rate should we use to consider the value of things that happen in the far future? Similarly, all should know that Stern and others have had to use a very much lower than market interest rate to reach the conclusions that they do. But note that these assets, the future values of fossil fuel reserves, are discounted at a market interest rate. Meaning that the value of reserves in 50 years' time is, in net present value encapsulated in share price4s, pretty much nothing. For that's exactly what discounting over long periods of time does: thus the problem that Stern had and the need to *not* use market rates in order to bolster the case to do something. This works both ways, of course it does. Just as the use of market rates would lead to future damage from climate change being so trivial in present values that we'd do nothing about it, the use of market rates to value reserves in the far future means that value is so trivial we do not much about them.
And yes, amazingly, markets do value reserves using market interest and discount rates.
Oh: and there's another thing. The big oil companies already include in their evaluations of those future values the effects of a substantial carbon price. They're already valuing everything after the effects of the policies that you're pursuing Mr. Davey.
Government loans for master's students is a risky business
The chancellor announced a student loan system for postgraduate master's degrees in the Autumn Statement. Although many have praised the move, it risks doing more harm than good. There are the obvious unintended consequence of encouraging students to undertake courses that aren't in their (or taxpayers') best interest, but here I'll focus on risks to the nascent funding market for postgraduate loans.
It's certainly a popular policy. As the FT reports: "Universities, unions and business groups have reached rare agreement in welcoming new £10,000 loans intended to ‘revolutionise’ the support available for students taking postgraduate degrees." But the devil will be in the detail. Just consider the Student Loans Company, which MPs recently requested face an inquiry following the ‘persistent miscalculation’ of money paid out in loans that will not be repaid. But more important than the wasted money, the government’s intervention in the postgraduate student loan market risks crowding out private sector solutions.
The failure of the Professional and Career Development Loans (PCDL), which are already subsidised by the government through the Skills Funding Agency, is principally due to banks being ill-suited to lending to students (and one the main reasons for this is because of excessive banking regulation). The analogy with SME business lending is the right one – students, like SMEs, are risky and banks are no longer best placed to lend to them.
Smaller and leaner companies can fill the gap where banks fear to tread. As we have seen with Santander’s partnership with Funding Circle in SME finance, the banks know that nimble companies have the skills to plug gaps in the market. In fact, entrepreneurial companies like Future Finance, StudentFunder and Prodigy Finance are already responding to the demand for loans for postgraduate studies.
Whether the bulk of the money comes from peer-to-peer (P2P) investors, alumni or universities themselves, the plurality of the private sector would trump the one-size-fits all approach that the government could take. We are on the verge of the equivalent of the funding revolution we are seeing in SME finance but this intervention risks stymieing it.
All is not lost. The government will consult on how to put the policy into practice and here they have the opportunity to do less harm than copying the PCDL model. As with SME finance, the government could funnel the loans through providers already in the marketplace. And, most importantly, government needs an exit strategy so that we don’t see mission creep and the destruction of a private sector solution.
Philip Salter is director of The Entrepreneurs Network.