The Spending Plan, courage, and politicians
A ring-fenced National Health Service, a bill poised to commit future governments to spend 0.7% of GNI on international aid, a triple lock on pensions, senior military figures pushing for commitments to higher defence spending: these are inauspicious times in which to contemplate cutting the UK’s £77 billion structural budget deficit, but contemplate we must. Aside from the velleities and equivocations of the political parties when it comes to their respective deficit reduction plans (and most other things besides), the Taxpayers’ Alliance has today released their Spending Plan, which comes as a substantial contribution to the debate. The Spending Plan’s first goal is modest: to lay out a menu of cuts which would take public spending to 35.2% of GDP by 2019-20 – the level forecast by the Office for Budget Responsibility – its second more radical, to outline further measures which would cut spending to 31.7% of GDP, a level at which a single income tax of 30% could be implemented.
Despite the reasonableness of its first end point, or perhaps because of it, the Plan makes for sobering reading. An implementation of the first, less stringent, programme would, among other things, see the abolition of no less than three government departments (the Department for Business, Innovation and Skills; for Culture, Media and Sport; and of Energy and Climate Change), an end to national pay bargaining in the public sector, and a sizeable cut to Scotland’s grant from the UK government.
While the numbers add up, the issue is likely to arise in finding a politician willing to implement the proposals. As the TPA’s Chief Executive, Jonathan Isaby, puts it:
Our Spending Plan honestly sets out the savings that need to be made by whichever party or parties take power after the election. Today we challenge our political leaders to accept our plan or to produce a similarly rigorous set of proposals of their own which explain where it is that they would reduce spending instead.
The report recognises that reduced spending and deregulation are of no importance if they don't lead to people being better off in the long run, and makes the welcome case that making the state leaner is desirable for reasons other than deficit reduction. David B. Smith sets out the case that market economies grow faster, while the ASI's Director, Dr. Eamonn Butler, makes the ethical argument for lower taxes.
Despite the size of the challenge that future governments face, that markets have confidence in the UK’s ability to get its debt under control might serve as good evidence that all is, in fact, not lost. However, politicians would do well to come to the realisation that, whether those set out in The Spending Plan or not, radical decisions about the role of the state must be made; we can only hope this research helps them do that.
Electric cars won't save drivers anything, not one single red penny
We have the glorious news today that if only everyone drove electric cars then everyone driving an electric car would save loadsamoney. It isn't actually true though, electric cars won't save drivers anything at all, not one single red penny:
Electric cars could cut the UK’s oil imports by 40% and reduce drivers’ fuel bills by £13bn if deployed on a large scale, according to a new study.An electric vehicle surge would deliver an average £1,000 of fuel savings a year per driver, and spark a 47% drop in carbon emissions by 2030, said the Cambridge Econometrics study.
The paper, commissioned by the European Climate Foundation, said that air pollutants such as nitrogen oxide and particulates would be all but eliminated by mid-century, with knock-on health benefits from reduced respiratory diseases valued at over £1bn.
But enjoying the fruits of a clean vehicle boom will require an infrastructure roll-out soon, as the analysis assumes a deployment of over 6m electric vehicles by 2030 – growing to 23m by 2050 – powered by ambitious amounts of renewable energy.
And who, might we ask, has to pay for that infrastructure? Ah, yes, of course, that's us, the general taxpayer, isn't it? So, we're asked to dig into our pockets to make driving cheaper for other people. And given that it's not the poor who are going to be buying expensive electric vehicles that's us, the general taxpayer, subsidising the better off, isn't it? Not quite the way this is meant to work.
However, there's another problem with this. Which is that electric cars aren't going to save drivers any money at all, not in the long term. For petrol driven cars, if petrol were untaxed, are still very much cheaper than electric cars. Sure, for environmental reasons that might mean that a bit of subsidy to get the new technology rolling might be worth it (not that we agree but we're willing to accept the possibility at least). And that tax on petrol does raise some £27 billion for the Treasury, at least it did last time we looked.
Politicians are not simply going to acquiesce at having £27 billion less of our money a year to play with and dispose of as they wish. Thus, as electric cars become a larger portion of the fleet so taxation of electic cars will rise in order to replace that revenue lost from taxing petrol. That £27 billion is still going to be extracted from drivers whatever else happens.
So given that the savings from electric vehicles are entirely tax driven, and the tax system will not, as soon as the revenue loss becomes noticeable, stay static then we cannot say that the widespread adoption of electic cars will save drivers money.
In fact, given that the electric car untaxed is still more expensive than the petrol car untaxed, yet the political imperative will be to make sure that tax revenues do not fall, we will find out that electric cars cost drivers more than petrol driven. Because, once electric cars become popular, they will have to carry the costs of their inefficiency and also that same tax burden.
This idea that drivers will, in the long term, save money by having electric cars is thus a con. It simply won't happen: not when politicians so enjoy spending the money they raise through the taxation of driving.
Economic Nonsense: 23. Too much economic effort is wasted on branding and advertising
People tend to say this because they cannot see any value added by branding and advertising, assuming therefore that the resources put into them must add to the costs of items without adding to their value. It is true that branding and advertising cost money, but not true that they have no value. Both convey information that is important to consumers. Advertising is used to make customers aware that the product or service is available, and to indicate how it differs from similar products or services available from rival producers. It is an essential part of competition, and it is competition which keeps producers anxious to keep quality high and prices low. Advertising can tell potential customers details of both price and quality making them able to choose between rival offerings. It can serve to remind customers that the product is out there and available.
Branding serves to reassure people about quality. Companies take good care to protect the reputation of their brands because they know that their ability to sell goods depends on how people perceive them. When analysts calculate the value or a company, they include a price they estimate to be the worth of its brands.
Brands do more that that. Companies use them to convey an image that people might want to be part of. The boy who buys Nike trainers acquires more than the shoes. He acquires the knowledge of their quality, and the feeling he gets by being seen to be one of the circle of Nike wearers. He might gain the thrill of being seen to be cool and stylish, a person of discrimination and taste. Scotch malt whisky is branded in India as an aspirational drink, so young Indians determined to make good can drink it and feel they are part of a group that is on the way up. Long after the whisky has gone, they might remember and savour that feeling. These intangibles are among the most durable of consumer goods, and it is branding and advertising that attach them to the product.
Protectionism Takes on a Dangerous New Legal Identity: A New Threat Posed by State Sponsored Patent Trolls
This think piece sees Adam Smith Institute Senior Fellow Keith Boyfield explore a worrying aspect of the alarming growth of patent assertion authorities – often referred to across the pond as patent trolls. He highlights a particular brand of patent 'trolling' sponsored by foreign governments, and contemplates its implications for world trade and competitive markets. Major corporations, some past their sell by date, have lost none of their appetite for continuing to launch unjustified demands for patent royalties through patent assertion entities (PAEs) or patent trolls as they are more familiarly termed across the Atlantic. PAEs hold patents with a view to extracting a substantial sum from companies utilising the patents. (see Privateers and the sinister plot posed by ‘patent trolls’). Typically, patent trolls have little in the way of assets and no manufacturing operation: they exist simply to ‘milk’ patents on behalf of a parent organisation. The patent itself is the primary asset and the only with any real revenue-earning potential. Tellingly, a PAE’s payroll is dominated by a platoon of lawyers.
Their efforts aimed at exploiting weaknesses in the patents system have proved so damaging to commerce that they have now provoked action by Congress. Indeed, US legislators have redoubled their concern as the threat of patent trolls sponsored by foreign governments, notably the Chinese, looms on the horizon. Even countries in Europe, most obviously France, have already taken worryingly protectionist steps in this area, with their own state-sponsored patent trolls.
Patent trolls are growing in popularity – and are, in many cases spreading their wings. Troll-like behaviour is being exhibited by others, too, such as the ‘patent privateers’, of which more later.
The aggressive bullying exhibited by trolls in pursuit of patent rights has led to product development being stifled and the shackling of competition in the marketplace, particularly as it relates to consumer products and telecommunications. To give one striking example, recent research by economists at the Massachusetts Institute of Technology (MIT) has shown that sales of imaging software has declined by one third relative to other medical imaging products due to the threat posed by patent litigation. The demand for such medical services is buoyant, yet patients suffer[i].
Nokia, which once bestrode the planet as the leading manufacturer of mobile phones, has now sold its handset manufacturing operation to Microsoft yet, significantly, it has retained the bulk of its patent portfolio. Whereas it no longer focuses on producing phones, Rajeev Suri, the CEO, has made only modest attempts to disguise the company’s strategy of asserting its patents through aggressive licensing demands pursued by privateer subsidiaries with no assets and no manufacturing capability[ii]. His colleague, Nokia’s chief intellectual property officer, Paul Melin, acknowledges ominously that, “Divestment of patents has become a very important channel for us to monetise and realise the value of our research and development[iii]”.
As pointed out in an earlier blog by the author on the dangers associated with this behaviour (Privateers and the sinister plot posed by ‘patent trolls’, August 29th 2014), the cost of litigation and the awards given by US courts, notably in West Texas, can be staggering. PriceWaterhouse Coopers (PWC) report that 6,500 patent suits were filed in the US in 2013 of which PAEs – patent trolls – accounted for two thirds of them. PWC note that the median damages awarded in 2013 was a lucrative $4.3 million. America’s accounting journal – the CPA Practice Advisor – reckons “frivolous patent litigation costs US businesses $29 million a year in direct costs and $80 million in indirect costs”.
Patent privateers take the patent troll model a step further. Privateers focus on what are termed ‘better’ patents, associated with leading parent companies as opposed to obscure, antiquated patents. In practice, privateers tend to restructure the originating company’s portfolio into a series of sub-portfolios, thereby increasing the potential to generate lucrative royalties. They also aggregate patents into those they are already asserting with a view to increasing their negotiating leverage. Privateers are used by some of the larger market players as a form of rent-seeking through the courts – to undermine or attack their competitors by launching time-consuming and expensive lawsuits or other aggressive actions against successful market players.
In the last month the US Congress has made fresh moves to combat this menace to competitive, free markets. In February, Bob Goodlatte, the chairman of the House Judiciary Committee, reintroduced an Innovation Bill with the signatures of no less than 18 Democratic and Republican legislators – and potentially the support of a majority of House members. The House passed an earlier version of the Bill in December but it did not win support in the Senate prior to the closing of the session. Crucially, this revised Bill aims to raise the pleading requirements of a patent owner intent on making an infringement claim. If passed this could help to curb the activities of PAEs, whether based in the US or established by foreign governments.
The threat to competitive markets, both in the US and here in Britain, has significantly increased with the establishment of government sponsored PAEs, a move which carves out a dangerous new form of protectionism. The People’s Republic of China, for instance, has pumped huge sums[iv] into China’s Ruichan IPR Funds in order to acquire a portfolio of patents which it can they use to extract substantial royalty sums from licensees across the globe. This alarming new trend is dubbed ‘patent stockpiling’. Japan, South Korea, Taiwan and even France are adopting a similar strategy by way of rent-seeking activity. In the case of Korea, the state owned PAE, the misnamed Intellectual Discovery, has bought more than 200 patents, including one for retinal eye scan technology, with a view to maximising royalty income through aggressive threats to litigation. France Brevets – the French Government’s patent pool – has been open about the litigious protectionism inherent in such a model.
Britain needs to be aware of these growing dangers to world trade and brief its representatives in the EU (which handles all trade negotiations on behalf of the UK and other member states) to support initiatives aimed at addressing the threats posed by patent trolls in World Trade Organisation (WTO) talks, along with the ongoing negotiations taking place under the auspices of the Transatlantic Trade and Investment Partnership (TTIP). Furthermore, our courts and legislators need to be wary of any rent-seeking in the form of frivolous patent suits aimed at extorting money from companies keen to innovate products and services.
If we do nothing about this menace we face a downturn in world trade, higher prices and a poorer deal for customers.
It’s time to act now.
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[i] See ‘Patent trolls: Congress gets down to business - A bipartisan consensus to address the issue is building in Washington’ by Steven Titch, Computerworld, 10 February 2015.
[ii] ‘Why Patent Reforms Are Needed: Intellectual Property Abuses Threaten Innovation and Cost Consumers Billions’ by Steven Titch, Heartland Institute, Chicago, February 2015 Briefing Paper.
[iii] Op cit endnote (i).
We might be at the right level of smoking regulation
Usually the costs of something rise as you do or have more of it, while its benefits fall. So unless the cost of the first unit is already very high or the benefits of the first unit are already very low there is some amount greater than zero that it is optimal to have or do. This is true for an individual and for a society. The first car you have massively changes your life. The second one adds pleasure, variety, and a good deal of practicality in some situations, but it's much less useful than the first. Nearly no one has three cars to themselves because the benefits are vanishingly small and the cost is rising for storage, upkeep reasons.
The first few million cars in a society the size of the UK are amazingly useful, the next million go to people who don't need them as much but do add to congestion, pollution and so on. The forty-millionth or sixty-millionth car starts taking up way more space than it's worth.
Well as the title suggests I think it's possible we might be approaching (or already have gone past) this point when it comes to smoking regulation. I wrote before about how plain packaging was probably a mirage (incidentally I learned today that the UK would drop three whole places, from 2nd to 5th on the GIPC's index of intellectual property rights protections if it passed it; though many of this blog's readers probably wouldn't mind that).
We may have needed very activist laws in the past because it really is quite difficult to inform people about anything really, and smoking is dangerous in important ways such that if you don't understand the decision you're taking you really could make your life a lot worse. But nowadays people may well even overestimate the costs and people are thus taking the right decisions to maximise social utility. It isn't a question of externalities because smokers actually cost the state less by dying earlier (a bad thing!)
This isn't just a musing. A new paper in the Journal of Cost-Benefit Analysis ("Retrospective and Prospective Cost-Benefit Analysis of US Anti-Smoking Policies" (pdf) by Lawrence Jin, Donald S. Kenkel, Feng Liu & Hua Wang) says roughly the same.
We use a dynamic population model to make counterfactual simulations of smoking prevalence rates and cigarette demand over time. In our retrospective BCA (Benefit-Cost Analysis) the simulation results imply that the overall impact of antismoking policies from 1964 – 2010 is to reduce total cigarette consumption by 28 percent.
At a discount rate of 3 percent the 1964-present value of the consumer benefits from anti-smoking policies through 2010 is estimated to be $573 billion ($2010). Although we are unable to develop a hard estimate of the policies’ costs, we discuss evidence that suggests the consumer benefits substantially outweigh the costs.
We then turn to a prospective BCA of future anti-smoking FDA regulations. At a discount rate of 3 percent the 2010-present value of the consumer benefits 30 years into the future from a simulated FDA tobacco regulation is estimated to be $100 billion. However, the nature of potential FDA tobacco regulations suggests that they might impose additional costs on consumers that make it less clear that the net benefits of the regulations will be positive.
Especially cool is the chart of a rational level of cigarette smoking, based on the benefits to the smoker of fulfilling their preferences vs the costs of frustrating their preferences for better health and a longer life.
I'm not saying that this research is conclusive. One paper is one paper. But I think it's getting to the point where further cigarette regulation is becoming intrusive and costly without necessarily producing large benefits to its purported targets. We should consider if we've maybe hit the cigarette regulation sweet spot.
We're all in favour of the empowerment of women, however....
It is rather necessary to get things the right way around. This following quotation gets it the wrong way around:
There is a plethora of data which demonstrates that women’s economic participation grows economies, creates jobs and builds inclusive prosperity.
Actually, there is no evidence of that at all. What there is is a great deal of evidence of a correlation between an advancing economy and greater, leading to equal, rights for women. But as we all know, correlation and causation are not the same thing.
We maintain that the causation actually works the other way around. It is an advancing economy that leads to greater rights, leading to that equality, for women.
To take two very basic examples. The aim and pupose of life, assuming Darwin was right, is to have grandchildren. It wasn't that long ago (and is still true in the more benighted parts of the world) that a woman would need to have 6 to 8 children in order to be able to have some reasonable guarantee (absent some dreadful plague that carried them all off) that grandchildren would arrive. In turn this meant spending almost all of fertile adult life either pregnant or suckling: and even after that not a great deal of time for anything else. Once child mortality fell, as blessedly it has done for us and is doing for the more benighted, then the number of children necessary falls and so therefore does fertility. Freeing up that time for that greater equality and so on.
Secondly, consider a poor economy. It is, almost by definition, one reliant upon human and animal power. And women are, we've all noted, rather lacking in that muscle power as compared to men. Thus that traditional division of labour between the sexes. One sex does the heavy lifting out in the money economy, the other does the just as difficult, just as boring, but physically lighter work in the household. Once we move on from muscle power to machine that greater economic equality is actually possible: and it happens.
Telling women in a subsistence agricultural economy about empowerment is therefore a bit of a swiz. What is necessary is to get out of being a subsistence agricultural economy and the empowerment will naturally follow.
There's no doubt that there's a correlation between this capitalist/free market economic growth and women's empowerment. It's just that it's the growth that causes the empowerment, not the other way around.
All the more reason to support that economic growth of course, for we all most assuredly desire the empowerment.
Economic Nonsense: 22. Only by understanding the causes of poverty can we act to reduce it
This assertion is nonsense because it erroneously supposes that poverty has causes; in fact it is the lack of poverty that has causes. Poverty is, alas, the default condition. It is what happens when you do nothing. Anyone who wants to experience poverty has only to do nothing for a year. If they survive that long, they will be poor, poor because they have not done the things it takes to create wealth. Poverty has unfortunately been the lot of most of humankind for most of its existence. First by hunting and gathering, then by agriculture and animal husbandry, people have lived on the edge of survival, always striving to obtain their food supply. If they had a few bad days at hunting, or a bad harvest at farming, poverty would come, bringing malnutrition and death with it.
At some stage people developed trade, exchanging goods with other, sometimes distant peoples. They learned how to specialize and to generate wealth. With the Industrial Revolution our ability to do this multiplied enormously. Wealth was created on an unprecedented scale, and for most people in the richer countries extreme poverty has become a thing of the past.
Other nations that have followed the same route have achieved similar progress themselves. Only in the past few decades has wealth been multiplied in poorer countries. First Japan became rich, then the 'tiger' economies of South Korea, Singapore, Hong Kong and Taiwan. Following them have been countries such as Malaysia and Thailand, and most dramatically of all, the giants of India and China, lifting over a billion people out of poverty.
To move out of poverty takes trade, specialization, investment and infrastructure. It takes stable property rights, clear titles to land, efficient and honest courts, and governments that are neither predatory nor rapacious. These are the conditions under which people find space to improve their lot and to create wealth. Failure to achieve a reasonable measure of these will keep a country in poverty. Poverty is not caused by things people do, but by things they fail to do.
There's no tradeoff between 'quality' and quantity of kids
One of the key elements of human capital theory is the idea of a trade-off between having more, lower 'quality' kids and fewer higher 'quality' kids. That is: having more children and having less money to spend on their education, healthcare and so on, leaving them with less human capital (anything that makes their labour more valuable), or having fewer kids and having more money for all those things. You can have two high-achievers or ten low-achievers, the theory would go.
We know there was a demographic transition first in Northwest Europe then in all developed countries and even now some developing countries. This saw fertility crash down to where it stands now—only about replacement value (and much lower in some places like Japan and Russia). One theory holds that this explains part of the industrial revolution: parents have fewer kids but invest more in the ones they do have, leading to more smart tinkerers, scientists, skilled workers and so on—and faster growth and more wealth.
A new paper from two of my favourite economic historians, Gregory Clark of UC Davis, and his regular co-author Neil Cummins (I blogged on some of his other work earlier) of the LSE, tackles this question by looking at the mindblowingly productive surnames database they have already mined to effectively overturn the entirety of existing social mobility research.
The paper, entitled "The Child Quality-Quantity Tradeoff, England, 1750-1879: Is a Fundamental Component of the Economic Theory of Growth Missing?" (pdf, excerpts), fits into the usual Clark/Cummins mould. It's well-written, clear, filled with hugely interesting tidbits, and it overturns popular but flawed views. Here they argue that the Industrial Revolution and gigantic rise in wealth and living standards since the 1700s (or even the 1600s) cannot be down to a quality-quantity trade-off in kids because kids in bigger families had life outcomes indistinguishable from kids in smaller families.
A child quantity/quality tradeoff has been a central to economic theorizing about modern growth. Yet the evidence for this tradeoff is surprisingly limited. Measuring the tradeoff in the modern era is difficult because family size is chosen endogenously, and family size is negatively associated with unmeasured aspects of family “quality.” England 1770-1880 offers an opportunity to measure this tradeoff in the first modern economy. In this period there was little association between family sizes and family “quality”, and if anything this association was positive.
Also completed family size was largely randomly determined, varying in our sample from 1 to 18. We find no effect of family size on educational attainment, longevity, or child mortality. Child wealth at death declines with family size, but this effect disappears with grandchildren. The switch in England in the Industrial Revolution to faster growth rates thus seems to owe nothing to declining family size.
This isn't quite true for wealth, as they say; spreading inheritances among 10 siblings meant less for those 10 than if they had been five or two. But by the next generation (grandchildren of the original parents) this difference evaporated entirely. Isn't this a surprising fact when people claim that the children of the rich turn out rich because of the cash they inherit? It's just very very hard to pass wealth on through human capital investments (this seems to be one of the key truths of economics).
Most economics papers are not worth reading the whole way through but here I would definitely recommend it.
239 years of The Wealth of Nations
Today is the 239th anniversary of the publication of The Wealth of Nations by Adam Smith. For nearly a quarter of a millennium, we have actually known the principles by which wealth is created and maximised. The trouble is, that for a fair chunk of the same time, we have been trying to resist that information, thinking that we can somehow do better than the market. The Wealth of Nations is a great book: most objective commentators would probably put it among the top five books ever written, in terms of its influence on humankind and the way we live.
Yes, it's very eighteenth-century stuff, sprawling and wordy, with enormous digressions on things that do not seem very interesting to us today. Luckily, you do not have to read it, because you can download my Condensed Wealth of Nations instead.
And yet, Adam Smith's original is the book which took economics out of its primitive phase and made it distinctly modern. With a bit of time and effort, any of us can understand what Smith says because what he is describing is all around us today.
The very first sentence of the book dismisses the old idea that the wealth of a nation was the amount of gold and silver that it had hoarded up in its vaults. Rather, says Smith, the measure of a country's wealth is what it produces. In that first sentence, he had invented the idea of gross domestic product. In the second, he notes the wealth of individual citizens of that country depends on how many citizens are sharing this GDP. (So there,he had invented the idea of GDP per capita.) In the third, he talks about how many people are actually working to produce this wealth. (The concepts of the participation rate, and productivity.) Before we are past the first page, we can see that this is sensational stuff.
But surely his greatest breakthrough was the realisation that we do not have to conquer people or make things in order to increase our wealth. We can also increase it by simply exchanging things. If you have something I want and I have something you want, we are both better off by swapping it. And that is the foundation of market exchange and trade, and of the specialisation that makes our production and exchange system so spectacularly efficient, creating and spreading benefit throughout the world.
Teachers unions are bad for kids
Though everyone typically sees unions as being mainly for the benefit of their members, teachers' unions use a lot of pro-student rhetoric and often come across fairly angelic. They probably do have only the kids' interests at mind, but a new paper suggests that their existence doesn't necessarily benefit those kids.
Data comparing students' outcomes to teacher unionisation has until recently been fairly lacking. But according to the new study published last month, duty-to-bargain laws (which mean employers need to work with unions) lead to significantly worse labour market outcomes for students in schools subject to them.
Previous research has shown us that teacher collective bargaining laws increase teacher union membership and increase the likelihood that a school district unionises for the purpose of collective bargaining—i.e. they achieve their direct goals. But looking into the effect on the kids has been hampered by a lack of information liking people’s outcomes and the time that duty-to-bargain laws were passed.
This new study, conducted in the US by Michael F. Lovenheim and Alexander Willen, takes the timing of the passing of the duty-to-bargain laws between 1969 and 1987 and links them with long run educational and labour market outcomes among 35-49 year olds in 2005-2012, i.e. those subject to them..
What they found was that men subject to increased unionisation work less hours as adults and earn less. There is also evidence of a small decline in educational attainment for men and a long-run negative effect on labour supply for women that is equal in magnitude to that of men.
Of course, some of the kids tin this paper were subject to a vastly different educational environment than exists today, so we can't necessarily extrapolate to the UK. Nonetheless the general finding is quite plausible, and should contribute to policy debates around increasing or reducing the role of collective bargaining in the education sector.
If future research in this field continues to make the negative relationship apparent, we may be ever closer to exposing how teaching unions lower educational standards by supporting the timeservers over the strivers in the teaching profession.