Economic Nonsense: 32. Economies of scale mean that bigger is better

It can be true up to a point that bigger is better, and there can be economies of scale. It does vary, however, depending on the type of activity. In manufacturing, for example, larger orders for components or raw materials can yield bigger discounts. In service industries, however, bigger might mean less personal and therefore less attractive to customers. It is simply not true that bigger necessarily means better. Several different studies have put an upper limit of about 150 employees as the optimum size. Above that level relationships become more difficult and absenteeism can rise while productivity can fall. It is noticeable that some large organizations split themselves into smaller, semi-autonomous units in order to keep each one inside the threshold of manageability.

New firms are constantly entering the market and nearly always start small. Many succeed by taking business away from larger, more established firms that are slower to respond to changing tastes and needs and changing market conditions. Small firms create the overwhelming majority of new jobs in the UK. Small tends to be more adaptable, more nimble, and quicker to change. When firms grow large they can grow complacent, even sclerotic, with a bureaucracy that finds it difficult to change course. In larger units people often find it more difficult to relate to each other and to co-operate effectively.

If bigger necessarily meant better, firms would continue to grow. This does not tend to happen in practice. They expand to a size they feel comfortable with.

It has been claimed that large public industries and services, such as Britain's National Health Service, are literally too big to manage and would operate more efficiently if they were broken into smaller, more easily managed units. Experience suggests that schools have better results if their size is measured in hundreds rather than thousands.

While there can be economies of scale when a new firm is growing, there does seem to be a point after which diseconomies of scale outweigh the advantages of size.

Quantitative easing isn't a distortion

Dr. Bill Woolsey—previously the mayor of James Island, South Carolina, but also a lieutenant-colonel in the US Army, Associate Professor of Economics at The Citadel military training school, and market monetarist/free banking blogger of much repute—is one of my favourite economists. He has a unique way of explaining economic concepts in tightly logical and crystal clear fashion and couples it with a civil, friendly tone. His second-last post—Are Open Market Operations Distortionary?—is a classic example. If there is a central bank, he argues, responding to rises in money demand by creating new money through 'open market operations' (buying govt bonds with newly-created money) is not distortionary. Indeed, it would be distortionary not to respond.

Many of my fellow free bankers agree that when banks accommodate changes in the demand to hold their monetary liabilities, the result is equilibrating and nondistortionary.   However, they believe that when a central bank adjusts the quantity of base money to accommodate changes in the demand for it, there is something problematic with the process.   The injection of base money is somehow distortionary.

Now, I don't want to claim that this could never be a problem.   The Fed's policy since 2008 has most certainly become very distortionary--intentionally   Perhaps there should be no surprise that the Fed has attempted to funnel money into housing.    Using government interventions of one sort or another to promote home ownership has been the norm for  nearly a century now.

I will surely grant that the potential for a central bank to create an excess supply of money is much greater than that of private banks issuing any sort of money. My point is simply that to the degree a central bank limits its issue of new money to the amount demanded, there is nothing especially distorting about the process.   It is coordinating.

The proper comparison is not what would happen if the nominal quantity of money remained fixed and there was a deflation of prices and wages.  Nor is the proper comparison to what would have happened if there had never been an increase in the supply of saving.  The proper comparison is what would happen if there was a increase in the supply of saving by purchasing government bonds.

Read the whole thing.

What should we do if Piketty is right?

The biggest non-fiction book release of 2014 was surely Thomas Piketty's Capital in the 21st Century which managed to inspire a frenzy of response from academics, the intelligentsia, and even huge sales. I hope I can fairly reduce his argument to the claim that wealth inequality will widen if the return on capital (r) is higher than the growth rate (g). Recently Matt Rognlie has presented it with what many have seen as a very serious response (pdf) based on the point that more or less the entirety of the widening in the wealth gap since the 1970s has been down to rising land values, themselves based on restrictive planning policies rather than a fundamental mechanism to do with r and g.

Without having got more than 10% through Piketty's book, I'm hardly in a place to weigh up these perspectives, but I was very interested by a new paper from Clemens Fuest, Andreas Peichl and Daniel Waldenström, whose work on corporation tax I already knew well.

Entitled "Piketty's r - g model: wealth inequality and tax policy" (pdf) it finds some evidence for his model being true, then asks 'if it is true, what shall we do?' Well it turns out that we should pretty much follow the ASI's budget wishlist policies!

Increasing the taxation of mobile capital is only possible on a global scale, as suggested by Piketty (2014). Experience with policy coordination in this area suggests that this will not be possible. It therefore seems more promising to try to increase g rather than to decrease r through tax policy.

Some evidence suggests that recurrent taxes on immovable property and consumption taxes (and other property taxes) are the least distortive tax instrument in terms of reducing long-run GDP per capita. Increasing these taxes and using the additional revenue to reduce labour taxes, for instance, would probably stimulate growth and have positive effects on the income distribution.

Tax consumption, tax (the consumption of) land values, reduce distortionary taxes on labour (and, we might add, capital and transactions). If Piketty has as much influence on the Left as it looked like he might then maybe the world's tax systems are in for some major boosts to efficiency!

Logical Fallacies: 20. Argumentum ad numeram

https://www.youtube.com/watch?v=7BUNbDelojg  

The final instalment in Madsen Pirie's series on Logical Fallacies; here he looks at the 'argumentum ad numeram'.

You can pre-order the new edition of Dr. Madsen Pirie's How to Win Every Argument here

An interesting view of what bankers actually do

It's a commonplace in the public square these days that bankers are the evil ones, designing odd products like a CDS or CDO, to trap the unwary investor into parting with all their worldly wealth. and then there's the occasional expression of a more obviously sensible view, as in this one about Islamic banking:

Many of the instruments Irfan discusses were sold by major banks that saw them as just another opportunity. This is not surprising: Governments and wealthy individuals wanted financing that complied with their religious requirements, and banks gave it to them. Irfan, by contrast, longs for an Islamic finance industry that caters to “small and medium-sized enterprises, retail customers, the man in the street” and offers something “beneficial to everyone, irrespective of creed.”

The actual book is about Islamic financing, a subject we find quite fascinating. For of course the basis of said Islamic financing is an outright denial of something that we hold to be an obvious truth: there's a time value to money. That there is is what leads to there being an interest rate and also to all those other techniques like discounting to get to net present values and so on. We take these to be simply obvious truths about the universe that we humans inhabit and one can, as experiments have, derive the existence of that time value by studying small children. A baby doesn't get the idea of delayed gratification for greater gratification, a three year old will usually grasp the idea of two sweeties tomorrow instead of one now and a 6 year old might go for two in a week for one now. This is an interest rate and it does seem to be innate in human beings.

So, obviously, it could be seen as a little odd that we not only enjoy but thoroughly approve of these various Islamic alternatives. For they all (things like Sukuk bonds and so on) depend upon the absolute rejection of interest, that very thing that we insist is part of the fabric of our reality. The reason we so like Islamic finance is because all of he successful forms of it are actually constructs that, in the face of the religious insistence that there should be no interest, actually operate in a manner to ensure that there is a time value to money and that there is an interest rate, interest which has to be paid.

Which brings us back to what we liked about that description of banking: they bankers are simply providing what their customers want. Seems a more honest trade than many to us, enabling someone to meet their religious obligations while still saving for their old age and the like.

Economic Nonsense: 31. The modern economy is so complex that only government can manage it

Actually, the opposite is true. The modern economy is so complex that even government cannot manage it. Who can manage it, then? The answer is no-one. No single authority or group of people can handle the volume of information, the speed of its responses and the complexity of its relationships. This is not to say that the modern economy is out of control, but only to say that the self-regulating mechanisms within it can respond more rapidly and more surely than any body outside of it. A market economy is a self-regulating system. It responds to new information and signals people to change behaviour accordingly. Much as a thermostat detects temperature changes and adjusts the heat supply, so the market detects imbalances, shortages and surpluses and leads people to alter their behaviour in ways that redress them.

Some people wrongly suppose that if the economy is not centrally controlled in some way, then chaos will result. Not so. The order of the market arises spontaneously from the millions of interactions constantly taking place. It holds more information than any group of planners could hope to access, and it is faster to react to changes than any controlling authority could manage to achieve. It is also more intelligent, representing as it does the minds of the many rather than the limited brain power of a few people grouped around a table trying to direct it.

The economy directed by the actions of many allows different individuals to purse their separate goals, where the centrally directed economy is geared to achieving the aims of its planners instead. The market economy thus allows people to give effect to their own values and priorities, to be autonomous actors rather than the agents of someone else's will. It allows for a society that is more free as well as more efficient.

When the process is the punishment

It's about time that we Brits adopted an entirely sensible piece of American law. In their Constitution they not only insist upon a fair trial they also insist upon a speedy one. The actual enactment of that promise is left to State law, but at least some of them insist that a trial must start within 30 days of charges being laid. The defendant may apply to extend that period but the prosecution may not:

While their colleagues covered events like the London 2012 Olympics, the Queen’s Diamond Jubilee, Andy Murray’s Wimbledon win and the birth of Prince George, the four Sun men stayed at home, on bail, suspended from their jobs, trying to maintain their mental and physical health.

Murderers, rapists and terrorists can expect to wait no more than a year to be tried once they have been arrested, but the four journalists were left in purgatory for three times as long.

Leave aside whatever one might think of this particular case, the law surrounding it or the verdict. And concentrate just on the idea that these men had some 10% of their working lives taken from them before being found not guilty. There won't be any compensation for this either. And that's turning the process of prosecution into something much more akin to the punishment itself, rather than what it's supposed to be, the finding and nailing of those guilty enough to be punished.

What should create fear in the rest of us is that given the volume of laws that weight upon us we're all in theory capable of being prosecuted for something or other. And our vindication by a good and sensible jury will be as nothing if the punishment is the process of getting the case in front of a jury in the first place.

So, yes, we should institute that American idea. Justice delayed is justice denied and so we should have a (short) time limit in which the prosecution must put up or shut up.

It's always the same with these bureaucratic cash targets

The thing that is the same being that hitting the bureaucratic cash target becomes the priority, not actually spending the money in a reasonable or value adding manner:

More than two thirds of Britain’s aid budget is being given to organisations such as the EU and the World Bank to help meet official targets, despite billions of it going unspent for years, an investigation has concluded.

MPs found that £6.3 billion of Britain’s aid budget is being handed to major agencies to help hit the Government’s target of spending 0.7 per cent of the nation’s income on overseas aid.

Their report found that a growing proportion of the money is set aside for future spending, which means it goes unspent for an average of two years.

The amount committed to major organisations that has yet to be spent has increased from £1.5 billion in March 2010 to £3.7 billion in March 2014.

It was never sensible to adopt the target in the first place. And as we're now borrowing that money to immediately hand it off into the bank account of the international bureaucracy we really shouldn't be trying to achieve it now.

Raising the NI threshold would have cross-party support

In Wednesday’s Budget we saw the personal allowance threshold rise again; starting April 2016, earnings up to £10,800 will be tax-exempt. The coalition knows that raising the personal allowance is a politically popular idea (not to mention good public policy). It’s great to see them inch slightly closer to taking minimum wage earners out of income tax all together.

But given how in-tune they are with the tax relief this policy provides to low earners, it’s hard to make sense of their decision to ignore the National Insurance threshold, which currently sits well below the personal allowance threshold at £7,956/year. 

Especially when it would be politically popular to address it.

A pre-Budget poll from YouGov asked Conservative, Labour, Lib Dem and UKIP respondents which policies they would support or oppose if the Chancellor were to announce them on Wednesday. The policy that received the most support (83%) was raising the personal allowance threshold to £11,000, followed by “raising the National Insurance threshold, so it is no longer paid by the lowest earners”, which received 71% support.

It gets even more interesting if you break it down by party. On NI, both Conservatives and Lib Dems supported the policy with a 75% majority, followed closely by Labour at 72%. UKIP brought the average down slightly, but with a significant majority still favouring the policy at 68%.

Getting the poor out of tax has strong cross-party support and the Chancellor should, in theory, be able to implement changes to the NI threshold without extreme push back from any opposition parties. Yes, the coalition should be credited for their reforms to the personal allowance, but now is hardly the time to go soft on a bad tax that continues to hit the poor hard.

Non-payment of BBC licence fee accounts for 10% of prosecutions

The BBC is responsible for more than one in 10 criminal prosecutions. Culture Secretary Sajid Javid reports that 10% of magistrate court cases are for non-payment of the BBC licence fee. Non-payment is a criminal offence, punishable by a fine of up to £1,000. Every week about 3,000 people are fined for non-payment, and about one person a week is jailed for non-payment of the fine. Women make up about 70% of those prosecuted and convicted, and half of those jailed for not paying the fine. When people fail to pay other utilities, such as energy companies, they are guilty of a civil offence, not a criminal one, and they cannot be prosecuted and fined for falling behind with their payments. Civil action can be taken for recovery, but without fines and jail terms.

Several newspapers have had reporters visit magistrate's court to describe what goes on. They all tell harrowing stories of frightened, distressed people, mostly women, facing fines they cannot pay under threat of imprisonment if they do not. Many are single mothers, many on benefits. They have not paid the licence fee because they cannot afford to. The sum of £145.50 per year is huge for a young mother struggling to feed and clothe children. Many weep in court, unable to pay the fine for the same reason they couldn't afford the licence fee; they don't have the money.

Everyone with a TV, except the over 75s, has to pay, whether or not they watch BBC programmes. If people fail to pay for other services, such as a Sky subscription, for example, the service is withdrawn without them being taken to court and fined.

In 21st century Britain we should not be dragging helpless women through courts and fining them, or making their lives more wretched than they already are by putting them in jail for non-payment of those fines. It should be a civil, not a criminal offence, and should be dealt with by withdrawal of the service rather than by prosecution. The technology to do this is relatively simple.

The development of tiny transistor radios killed the radio licence in 1971. Now laptops, tablets and smartphones make the BBC licence fee increasingly difficult to sustain. Many watch TV on portable devices instead of TV sets. They watch programmes on Catch Up and iPlayer. Many do not watch BBC programmes at all. Clearly an alternative way of financing the BBC has to be found. That will take time, but before then non-payment of its licence should be a civil, not a criminal action, and we should stop letting the BBC hound helpless people through the courts.